Though there is a reasonably strong seasonal tendency for stocks to rally into the end of the year, consider the dangers in one-way trades. Many people know this tendency (the famed Santa Clause rally), and are probably banking on it, so there is risk of at outsized decline if markets do not stage a quick recovery. It is not so much that we are watching a specific level in the market; the important concept is structural—if the bulls are truly in control, we should see a fairly quick, sharp recovery from last week’s selloff. If not, look for a possible short-term downdraft.
