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Weekly Market Update - Santa comes to Wall Street, will he stay?

Major averages finished the week on an extremely positive note and some analysts are talking Santa Claus rally. Related ETFs shared in the holiday spirit. For example, after gapping down recently, we see SPY gapping up on Friday.

Still, there are questions to be answered.

If the S&P 500 gained 1.67% on Friday, why did SPY only gain 0.91%? Was it because SPY was in the top spot on the money flow list for Selling on Strength? With much of the selling in block trades, does that mean that institutions (the "smart money", perhaps) might be betting against this rally?

If the SPDR Financial ETF (XLF) gained only 0.93% on Friday why did the UltraShort Financial (SKF) fall 3.62%?

Three major Wall St firms reported earnings this week. Why did the ones that lost billions (Morgan Stanley and Bear Stearns) see their share prices increase while the one that executed well and turned a profit (Goldman Sachs) saw its share price fall?

Why isn't it a sign of weakness when so many financial stalwarts are seeking capital infusions from sovereign wealth funds in order to bolster their balance sheets?

Why was the market so hot to rally when Fed Ex, typically a bellwether for the economy, reported disappointing earnings based on high oil prices and falling demand for package deliveries? The Dow Transports have crossed below the Industrials. Isn't that a bearish signal according to Dow Theory?

Why was the market so overjoyed to see consumer spending up in November? Isn't that looking in the rearview mirror? Didn't the market notice in the same report that inflation is now creeping above the Fed's comfort range? Haven't we been hearing that, with the exception of consumer electronics and video games, December sales have been lackluster?

The VIX plunged and fell below 20. Is volatility suddenly a thing of the past?

Though the Advance/Decline line was quite positive Friday, why are we still racking up significantly more 52-week lows than 52-week highs?

Why did the market rally on the news that the facility intended to rescue SIVs was being abandoned? Doesn't that virtually ensure we will see more writedowns from big banks?

Why was an interest rate hike in China greeted with a rally in Chinese stocks?

I guess the answer to all these questions is that, for now, all news is good news. Those, like me, who have some bearish positions should be ready to suffer for our lack of optimism.

In any case, we did have some big tech names, Oracle (ORCL) and Research in Motion (RIMM), report excellent earnings this week and that certainly helped the market. Nevertheless, some analysts have written that Oracle should not be used as a proxy for the entire enterprise software sector. So is tech the place to be or isn't it?

Financials endured more bad news with a host of bond insurers being downgraded. Better late than never, I guess. Merrill Lynch is selling a piece of itself to an investment fund from Singapore as rumors abound of more big writedowns to be announced. The ECB and the Fed poured unprecedented amounts of cash into credit markets this week and we saw only slight improvements in interest rate spreads. Investors seem to believe that, despite all the problems, at least we will not see a major bank fail so everything must be alright now.

I am not in the camp with those who expect a recession but, given all the questions (and attendant uncertainty) I have been expecting stock prices to weaken a bit further over the course of the next few months. Market sentiment, however, seems to be swinging in the other direction. As many of the trading oriented blogs say: Mr. Market does what he wants to do and it doesn't necessarily have to make sense to you.


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