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Market Lab Report - Premarket Pulse 12/11/15

Major averages rose yesterday on lower volume. The number of distribution days combined with lackluster performance on the part of leading stocks implies further downside. But given the slower time of year combined with seasonal strength as well as shallow floors which have been the character of the markets since 2013, the market could remain stuck in this trading range. Still, a repeat of last December could occur where the majors drop 5% from peak to trough in a hurry, taking down leading stocks. That said, the majors are off about 3-4% from their highs so their decline may be limited.

Nevertheless, despite the slower time of year, continue to keep a close eye on any long positions. The Fed's action this December 16 may contribute to elevated levels of volatility since their decision is historically significant and would be the first rate hike in nine years. CME FedWatch futures show 83% as the probability of a rate hike.

Futures are down about 1% this morning as crude oil makes lower lows and European markets are weak overnight. The S&P 500 has now closed below its 50-day moving average twice this week, while the NASDAQ Composite found support near its own 50-day line on Wednesday. The indexes remain in a tenuous position, which is all the more reason to exercise caution. As Gil Morales pointed out in yesterday's live market webinar, the broader indexes, such as the New York Composite and the Russell 2000, are showing negative divergences as they did back in July before the market came apart in August. While a so-called Santa Claus rally might emerge before year-end, it may be muted and the market's breadth issues may have a more pronounced effect come the New Year.

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