Happy New Year, everyone! Thanks for being with us!

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Stocks were down on Friday, with a late dip into the close pushing the Dow down to a triple digit loss of 118-points on the final trading day of the year. It may have just been a case of unwinding losing positions, or just flattening out accounts for tax purposes, but it was certainly a stark move as volatility spiked near the close. The I-fund held up well because of the drop in the dollar, and the late selling in U.S. stocks.

The S&P 500 was down on the final day of the year for the 4th year in a row, but the C-fund ended the year with strong gains making it the 9th consecutive year with a positive return. I've mentioned before that the last time that happened (1991 - 1999) we saw negative years for the next three years. The small caps and the I-fund were down two and three times respectively, during those 9 years.

The late action on Friday was bold and certainly not indicative of what 2017 was all about. Volatility has gone missing and the bears will be looking for it in 2018. It never did hit 20.0 last year, and that was the first time since 2005, plus it spent a lot of the time below 10.0 in 2017, which hadn't happened since a few brief readings below 10 in early 2007.

Viewing the S&P 500 futures action, it was a major outside reversal day, which could mean trouble to start the new year, but again it may have just been end of year positioning.

Looking at the 15-minute chart, it looks as if the loss continued after the cash markets closed at 4 PM ET on Friday, and the S&P futures dropped another 10-points over the next 90-minutes after hours Friday evening. They opened higher on Sunday evening erasing some of those after hour losses, but we'll have to see how this all gets translated for Tuesday morning's open.

The S&P 500 closed at 2685 on the Thursday before Christmas Eve. The official Santa Claus rally is occurs from Christmas Eve (or the last trading day before Christmas) until two days after the New Year. As I mentioned last week, Art Cashen said, in the last 24 years, only 6 times has the period between at period experienced a loss. Of those six times, 3 times the year that followed was flat. Twice it preceded a bear market, and once it saw a major sell-off - but not quite a bear market. So, we're watching 2685 on the S&P this Tuesday, if you believe in those tendencies. It closed this past Friday at 2674.

We get the December jobs report this Friday and consensus estimates are looking for a gain of 188,000 jobs, and an unemployment rate of 4.0%.

The SPY (S&P 500 / C-fund) was holding up most of the day on Friday, but a late push lower saw the chart break down from its recent rising support line. That's one warning sign but it remains above the 20, 50, and 200-day EMA's so there's not much technical damage done yet. The PMO indicator crossover is a potential problem.

The small caps / S-fund lost 0.6% on Friday but the chart does have some positives going for it as there are two bull flags (red), and if the small flag breaks down, there is more strong support near 1362. If it decides that it needs to test the bottom of the flag, then 1345 may be a potential target if it doesn't break to the upside first.

The Dow Transportation Index was flat in the last week or so to end the year, but it has rallied hard since Thanksgiving. The rising wedge could be a problem since it broke down already, but there's some decent support near 10,500.

The EAFE Index (I-fund) had a great year and closed with a solid gain on friday despite the losses in the U.S. markets. The reason is that the selling in the U.S. markets came very late and after the overseas markets closed, plus the dollar was down 0.4% and that was all it needed.

The dollar had its worst year since 2003 and its trying to find support near 24.0. The weakness is a bit puzzling considering bond yields rising and the Fed on a mission to raise rates several times this year. I'd be surprised if we don't see some kind of rebound in the coming weeks / months.

The AGG (bonds / F-fund) was up again on Friday as bonds rallied strongly during the final week of trading in 2017. It's still in an uptrend but that has a bearish flag look to it. It may try to test the top of that rising range but without a sell-off in stocks, that would probably be as far as it would go. If stocks do fall to start the year, then a breakout in the AGG would be more possible.

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Thanks for reading.

Tom Crowley
http://www.tsptalk.com