Rebalancing and Triple Witching, Dollar Down, Commodities Up, Gold Miners ETF

I've been waiting here to be your guide

So come

Reveal the secrets that you keep inside

Step up!

No one leaves until the night is done

The amplifier starts to hum

The carnival has just begun

-- "Psycho Circus" Cuomo, Stanley (KISS), 1998

Welcome to the Show

On Wednesday afternoon, financial markets rallied on heavy trading volume in response to an overtly dovish pivot made by the FOMC that came a few months earlier than most traders expected. On Thursday, the risk-on attitude struggled through some mild resistance, but overall, persisted on even heavier trading volume. On Friday, this morning, trading volumes will likely stun even the most seasoned traders, as a final "triple witching" expirations event runs smack dab into the quarterly and annual rebalancings of both the S&P 500 and Nasdaq 100.

Before the day is done, options with a notional value of well more than $5T (with a "T") tied to single stocks/ETFs, and indexes will expire with index-tracking futures contracts. There will be huge trading volume on both the opening and closing bells as the reconstitution of the headline-level equity indexes ahead of Monday's open will place heightened significance on the last sale of Friday's regular session.

Many traders expect not just the busiest expirations event of the year, which is normal for the December "triple witch," but with so much going on alongside this event, this could be the most heavily traded expirations Friday in many years. Setting up for the event, a CBOE record 4.8M S&P 500-linked contracts traded on Thursday. Goldman Sachs (GS) is reporting that the total for call-trading volume of all U.S. equity options exceeded 30M contracts on Wednesday alone (which I read about in Joseph Adinolfi's column at MarketWatch). All as the VIX threatens to trade down into single digits.

No need for nerves, gang. You will see some things on intraday charts today that you might not expect and maybe cannot quickly explain. We've all been through days like this before. The trick is to "trade" in the moment, but to not get shaken out of investments that you understand and have a high level of confidence in. The sun will come out on Monday morning and any short-term inefficiencies created this day will smooth out over a few days, on much lighter trading volume.

Down Goes Frazier

And down goes the U.S. Dollar Index. Both the European Central Bank and the Bank of England held their benchmark rates in place on Thursday morning, as did the Federal Reserve on Wednesday. The difference is that the Fed is already leaning quite dovishly into the new year, while these two central banks appear to still be thinking hawkish thoughts. This pushed the "Dixie" or U.S. Dollar Index down to roughly 101.8 at its lows on Thursday from just below 104 ahead of the FOMC policy statement on Wednesday.

The ECB kept its main refinancing rate at 4.5% and its deposit rate at 4% on Thursday, while downgrading forecasts for inflation both for this year and next. However, ECB President Christine Lagarde admitted that there was "no discussion, no debate" about when and/or if it might become appropriate to reduce interest rates.

The BOE left its main Bank Rate at 5.25%, but there was dissension in the ranks. The MPC (The BOE's version of the FOMC) voted 6-3 to leave that rate where it was. The minority all voted for a 25 basis point increase. BOE Gov. Andrew Bailey in his letter to the U.K. Treasury, wrote that policy needs to remain restrictive "for an extended period of time" and "we still have some way to go."

While headline consumer-level inflation has dropped to 3.1% in the U.S. and 2.9% in the eurozone, it's still pretty hot (4.6%) in the U.K. All three of these central banks are targeting 2% inflation. On the economic front, the U.S. is the only one of the three to sport actual growth in its most recent report. The U.K. and eurozone economies are currently both in a state of contraction.

On That Note...

November Retail Sales surprised to the upside in the U.S. Headline Retail Sales popped for month-over-month growth of 0.3%, easily topping expectations for -0.1%. Core (ex-autos) Retail Sales grew 0.2% from October's level, also against consensus for -0.1%. Interestingly, gasoline sales and physical retail pressured these results, while actual purchase of fun, or what some might see as non-necessities, pushed retail sales higher in November.

Food & drink services advanced for monthly growth of 1.6%, as furniture gained 0.9%. Most telling is what I refer to as the "fun" index, which is the entry labeled "sporting goods, hobby, musical instruments & books" because this kind of spending is purely discretionary in nature. This item has been one of the weakest entries all year, which is usually seen as a sign of a soft or weakening economy. Well, this "fun" index might just be up 0.2% year over year, but it had been negative, and it did enjoy a 1.3% pop month over month to get there.

In response, the Atlanta Fed revised its GDPNow model for Q4 economic growth all the way from +1.2% to +2.6% (q/q, SAAR). In getting there, the inputs for real personal consumption expenditures, real gross private domestic investment and real government spending were all tweaked higher, being only slightly offset by a downward revision to the input for real net exports. The Atlanta Fed will again revise the model this coming Tuesday after November Housing Starts hit the tape.

Rally On, Garth

It might have not been as easy as it was late Wednesday, but as that U.S. dollar weakened and as Treasuries continued to rally, so did equities and commodities. WTI Crude futures have gone from trying to hang on to a $68 handle to trying to take back the $72 handle since late Wednesday. Gold has popped, silver has popped. Energy commodities have popped. Agricultural commodities have popped.

On Thursday, the yield for the U.S. 10-Year Note dropped another 11 basis points to 3.92%, as the yield for the 2-Year Note fell 10 basis points to 4.38%. Shorter-term paper appears to have stabilized. Both the 2-Year and 10-Year Notes stand at zero-dark thirty where they went out on Thursday afternoon.

Again, smaller-cap and narrowly focused equity indexes outperformed the headliners, while the S&P 500 and Nasdaq Composite gained just 0.26% and 0.19% respectively, The S&P SmallCap 600 gained 2.91%, the Russell 2000 2.72% and the S&P MidCap 400 2.37%. Among the narrowly focused, the KBW Bank Index screamed 5.08% higher and is now down just 4.22% year to date. March be darned.

The performance tables were turned around a little bit on Thursday. Readers will recall that Wednesday afternoon's rally was dominated by the defensive sectors. This was not the case on Thursday. Seven of the 11 S&P sector SPDR ETFs shaded green for the session with three of the four funds that closed in the red coming from the ranks of those defensives. The Staples (XLP) and the Utilities (XLU) gave up 1.47% and 1.3%, respectively, while Energy (XLE) , of all sectors, led the way north, at up 2.94%.

Breadth was again, spectacular. Winners beat losers at the NYSE by roughly 4 to 1 and at the Nasdaq by about 5 to 2. Advancing volume took an 82.2% share of composite NYSE-listed trade and a 75.4% share of composite Nasdaq-listed trade.

Now, here's the incredible part...

Aggregate trade was up 24.7% day over day on Thursday for NYSE-listings after being up 33% day over day on Wednesday. Aggregate trade was up 19.3% day over day for Nasdaq listings on Thursday after being up 36% day over day on Wednesday. Additionally, trading volume across the S&P 500 topped its 50-day trading volume simple moving average (SMA) by 61% on Thursday after topping it by 31% on Wednesday. Trading volume across the Nasdaq Composite beat its 50-day trading volume SMA by 67% on Thursday after beating it by 43% on Wednesday.

In short, there has been a lot of juice in this rally of late. Many portfolio managers were late to shift, but have shifted in size over the past two sessions.

Inverse Head & Shoulders?

Readers will see that as gold and silver have rallied, so have the miners.

Here, the VanEck Vectors Gold Miners ETF (GDX) displays an inverse head & shoulders pattern with a neckline just above $30.

I am long this fund, and that's my pivot as it clearly had been tested as resistance on four occasions as this pattern developed. That puts my target at $36, but this really depends upon continued dollar weakness relative to its reserve currency peers.

Economics (All Times Eastern)

08:30 - Empire State Manufacturing Index (Dec):Expecting 1.8, Last 9.1.

09:15 - Industrial Production (Nov):Expecting 0.3% m/m, Last -0.6% m/m.

09:15 - Capacity Utilization (Nov): Expecting 79.1%,Last 78.9%.

09:45 - S&P Global Manufacturing PMI (Dec-Flash):Expecting 49.2,Last 49.4.

09:45 - S&P Global Services PMI (Dec-Flash): Expecting 50.6,Last 50.8.

13:00 - Baker Hughes Total Rig Count (Weekly):Last 626.

13:00 - Baker Hughes Oil Rig Count (Weekly): Last 503.

The Fed (All Times Eastern)

No public appearances scheduled.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (DRI) (1.73)

At the time of publication, Guilfoyle was long GDX.