By Pete Biebel, Vice President

The air was thick with optimism as traders returned from the holiday week. Last week ended with a huge rally on Friday that left investors with a warm and fuzzy feeling to tide them over the cold weekend. Sadly, closer examination will show that Friday’s gain merely lifted the averages back to where they had started the week. Coming back from Turkey day, in an atmosphere dripping with bullish confidence for a year-end rally, one might have expected easy progress higher for the stock market. The averages actually lost ground on the first four days of last week.

The good news is that, during that early-week decline, the broad averages tested an important area of support. I have written recently that breaking below the 1775 level on the S&P 500 Index (SPX) would be a troubling sign. That index dipped below 1780 midweek, but managed to avoid further damage, and Friday’s rally eliminated the threat. When viewed from a distance, the market’s performance last week seemed to be pleasant enough. However, upon closer inspection, one can’t help but notice a little fishiness in the air.

SPX first crossed the 1800 level in mid-November; it’s made very little net progress since then despite the overwhelming optimism. The ratio of declining issues to advancers, for the week, was an odoriferous two-to-one, the largest negative ratio in four months. Another tell-tale scent was the number of new (weekly) 52-week highs and lows on the NYSE: 323 new highs, 259 new lows. That’s the fewest new highs in two months and the narrowest difference in three months. By comparison, the NYSE had 688 new highs in the week of 10/21 and more than 900 new highs in each of the two weeks leading up to the May market top.

The market’s short-term malodorousness should not be of immediate concern to long-term investors; it’s nothing that a cleansing rally can’t wash away. The recent high on SPX was 1813.55 (Friday’s close was 1805.09); a sustained move above that level would be a breath of fresh air for the potential to rally into year-end. Conversely, taking out last Wednesday’s low (1779) would be a real stinker. In that event, as I suggested in recent weeks, one might want to accelerate their portfolio rebalancing plans.

Taper timers will be tuned in this afternoon when three regional Fed presidents (Richmond, St. Louis and Dallas) have speaking engagements. Fed officials will go into a blackout period beginning Tuesday in anticipation of next week’s FOMC meeting. Recently improved employment statistics have rekindled the possibility that the Fed may begin to taper its $85 billion per month pace of quantitative easing. While the market could well celebrate any indication that tapering will be postponed until early next year, it might just as easily go into a funk if the rhetoric implies a more immediate reduction.

The three key economic updates this week will be released on the mornings of Thursday and Friday. Thursday brings the weekly data on Jobless Claims. The recent news here has been quite favorable. Initial Unemployment Claims have decreased in seven of the past eight weeks. The four-week moving average of those claims, a more reliable indicator of the trend of jobless claims, has fallen for five straight weeks and is now near September’s multi-year low. The consensus among analysts is for Initial Claims for last week to come in around 325k, slightly above that four-week average, and well above the surprising 298k reported for the prior week.

At the same time on Thursday morning, Retail Sales for November will be announced. This report will likely carry a little more weight than usual due to the inclusion of the critical First Binge Shopping Weekend of the Holiday Season in its totals. Initial reports from the National Retail Federation indicated that Black Friday sales this year may have been slower than in recent years. Nevertheless, analysts expect the report to show November retail sales increased by 0.6% over the prior month. That compares to a 0.4% increase for the month of October.

The lone Friday report is the Producer Price Index, a measure of price inflation at the wholesale level. Declining food and energy prices have helped the overall PPI decrease for the past two months (-0.2% in October and -0.1% in September). The core rate, which excludes food and energy, increased both months (+0.2% in October and +0.1% in September). Economists project that the overall PPI will again decrease by 0.1% and the core rate will again increase by the same amount.

Gotta go now.