How will market follow up on the Dubai sell-off?

After some modest gains on Wednesday, stocks were sent reeling on Friday after some credit issues surfaced out of Dubai.  The TSP stock funds lost between 1.7% and 3.2% Friday with the I-fund lagging with assistance from a strong dollar.  The F-fund was up 0.26%.

For more on the problem in Dubai, see Bullitt's recent blog entry called, Dubai Thoughts.

Whenever you combine a light volume trading day with an unexpected news event, you can get some wild moves in the indices, and many times the reaction can be overblown.  We will find out today if buyers agree and step up and take advantage of Friday's sell-off.  Or, the other option could be that the market did not react enough to a possible global bottoming of the U.S. dollar because of the Dubai debt issue.  That would not be seen as a positive for the stock market, particularly the I-fund.

Ironically, the dollar had sunk to new lows after a steep decline on Wednesday, finally breaking the support area we were watching at 74.90, but the rally on Friday took it right back above that level, although it closed well off of the highs.  Did we see "the" low on Wednesday?

                       

The S&P 500 has been on a pretty steady rising trend, but there are obvious shorter-term inhales and exhales during the climb higher, and it may be running out of steam during this cycle and appears to be starting the exhale.


                  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

We talked about the VIX (Volatility Index) on Wednesday, and right on queue, the VIX did rebound off of the prior lows made in October, creating a large gap after Friday's sell-off in stocks.
                    
                  Charts provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Here is the 1950-2006 historical seasonality chart for December... 


                                Chart provided courtesy of www.sentimentrader.com
      
As always, seasonality is not a primary indicator; only a gentle breeze at the back of, or in the face of the market.  Looking at all of the green toward the end of the month tells us the market will have that breeze at its back.  But depending on market conditions, we don't know if it will be peddling up hill, or downhill.

That's all for today.  After Friday's light volume sell-off, there is too much uncertainty in the air to speculate on how investors will react to the Dubai news after the holiday weekend.  The S&P futures are up a handful of points as I write this on Sunday night. We should know more by tomorrow. 

Thanks for reading.  We will see you back here tomorrow.