Good morning and Happy Christmas Eve. We have a shortened session today – not sure why they bother but I guess to keep people busy. Anyhow, after the fiasco of Thursday night things have been downgraded from "Grand Bargain" to "Modest Bargain" to "Itty Bitty Bargain and kick the rest down the road". Shocked? So it sounds like some small compromise will be worked on "now" (now potentially being in 3 days or 3 weeks) with a "framework" to work on the hard things down the road. This is where you laugh because the sequester was supposed to force them to work on the hard things. In essence there are cans strewn all over the road, and they will just keep adding to them. The only question near term is whether enough GOP jump to the Dem's side in the house to get something done Dec 31st, or if we have to way until Jan 1 when the GOP holdouts can then claim they voted for a tax CUT, since it's all about politics. It will be the same outcome in the end but on Dec 31st, it would be a tax increase whereas 2 days later, on Jan 2nd, after everything reverts to pre Bush tax cut levels, they can claim it's a cut. Silly season at its best.
Economic data will be obviously light with new home sales Thu and Chicago PMI Friday. There actually have been some decent economic data points in the past week but it has been shrouded in the fiscal cliff. Incomes jumped sharply in the government data reported Friday, which if not a one month burp could put a dent in the "recession soon" camp. Hard to tell around the holiday period as seasonality skews things.
As for the markets Friday was a hiccup. We shall see if it's a harbinger of things to come or just a pit stop before the pattern that had finally resolved in a positive manner continues. As mentioned Friday, this gap down did some damage technically as it pushed most of the major indexes back below their "neckline" in this inverse head and shoulders pattern. This was the second failed attempt in as many weeks. On the positive side the S&P 500 is still making a series of higher highs and higher lows since the mid November bottom – however, if that changes there are potentially bigger issues.
There is a brighter picture in the small cap oriented Russell 2000, which has broken out well above early November highs and despite the damage Friday remains there. This is a seasonally strong period for small caps so this is another area to watch – if the index falls all the way back through it's early November highs, that leadership will have been reversed.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog