Surprised By The Rally

Color me surprised by the strength of yesterday's rally following the announcement that the Fed would begin to taper its asset purchases in January.  I would have guessed that the commencement of tapering would have been met with more selling, as folks digested the beginning of the end of the Fed-injected liquidity that many claim has propelled this bull market.

But after a brief dip the markets quickly found their footing and a strong bid emerged.  I guess that's the way this year has gone, with basically any news being construed as bullish and a reason to buy stocks.  The S&P 500 rallied all the way back to new highs, a strong showing indeed.

This morning we are seeing a bit of profit taking, but nothing serious.  Economic news was a bit mixed.  Leading indicators for November increased 0.8%.  The Philly Fed index rose to 7.0 from 6.5.  But existing home sales for November fell to 4.90 million units from 5.12 million the previous month.

In corporate news, Oracle (ORCL) is higher after beating earnings and revenues.  ACN is also higher after reporting, while Darden (DRI) is lower despite announcing it will spin out Red Lobster.

Asian markets were mixed overnight.  Japan rallied on the continued weakening of the yen (stronger exports) while China was lower amid continued liquidity concerns.  The 2-week SHIBOR rate spiked 114 basis points to 6.21%.

Europe's markets are mostly higher today.  Fitch affirmed the UK's debt rating at AA+ with a stable outlook.  And Eurozone finance ministers are close to a resolution on a mechanism to wind down troubled banks.

Oil prices are higher to $98.25 while gold prices are weak once again and falling below the $1200 level. 

The 10-year yield is higher today to 2.94%. 

And the volatility index has plunged.  It started yesterday on a strong downside reversal.  After touching 16.75 intraday yesterday the VIX closed below 14 and today is lower again down to 13.25.  Yesterday we commented that bulls wanted to see a move back below the 15 level to signal a start to a new rally.

Trading comment: The question after yesterday is, did we already get the Santa Claus rally in one day?  Yesterday's rally came on a big increase in volume and the strength was surprising.  Most people thought the eventual announcement of a taper might cause more concern among investors.  But a $10b taper starting in January isn't a huge amount, and is symbolic in nature in terms of sending the signal that the economy has improved enough to warrant this type of move.  Interest rates on the part of the Fed are likely to remain extremely low well in 2015