Happy December, everyone. As we head into the end of the year, let’s take a quick look at where the market is likely headed in the near term, in the longer-term, and give a few moments to thinking about the “Santa Claus” rally.
Near term structure
Make no mistake about it, markets have been hard to read lately. On one hand, this is natural when markets are in consolidation, but things are a bit worse due to the focus on the Fed’s action. We have reached an asinine point where “good news is bad news”—positive economic data is seen to potentially encourage the Fed to raise rates, so the market has tended to rally on negative news.
While this probably reflects some mass, crowd “stupidity”, it doesn’t matter. We don’t get points for being right while the market moves the other way—we only get paid if we are correctly aligned with the market.
Finding out what that correct alignment is has required some nimble maneuvering over the past few weeks, but we think the clues lie in the current range in the S&P 500. See the post at the top of this page for relevant support and resistance levels. We evaluate these daily and adjust positioning and bias on the most likely outcomes.
We are seeing moves in the yield curve that we have never seen before. (See our model below.) Does this portend a collapse in the stock market? With the (huge) caveats that nothing is 100%, that this time might be different due to factors such as the release of extended QE, etc., we think there is ample cause to be extremely concerned.
We suggest that our readers focus on defensive positioning in the quarters ahead, but would also remind short term traders that this is a bias that could take years to play out. There’s no disconnect between holding this longer-term negative bias and being aggressively long in the short-term!
The Santa Claus rally
This is also a time of year when we hear many people talking about the so-called Santa Claus rally. I’ll link a few posts I wrote digging into this phenomenon, but a few points are important:
- The Santa Claus rally is about the move between Christmas and the New Year.
- It is not a prediction for a rally into Christmas or through all of December.
- It was a real seasonal effect for decades, but has been weakening in recent years.
Read more about it here, in this post from 2018, and in the other posts linked there if you want to know much more about it. To update the stats, the “Santa Claus window” has actually been down most of the time over the past decade, but there were some large rallies that would have led to net profit if you had consistently traded this period.
So, the question is, do you intend to systematically trade the Santa Claus rally? If not, it probably should not be a factor in your end of year thinking and planning.
The week ahead (potentially market-moving data releases)
- Monday: Services PMI & Index, Factory Orders
- Tuesday: None
- Wednesday: Productivity & Unit Labor Cost
- Thursday: Jobless claims
- Friday: PPI