Breaking News
Black Friday SALE: Up to 54% off InvestingPro! Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

All I Want For Christmas Is A Bull Market

By Lance RobertsStock MarketsDec 27, 2020 12:02AM ET
www.investing.com/analysis/all-i-want-for-christmas-is-a-bull-market-200548957
All I Want For Christmas Is A Bull Market
By Lance Roberts   |  Dec 27, 2020 12:02AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Will Santa Claus Visit Broad & Wall

Today’s newsletter will be relatively short, but I want to update our portfolio positioning with you. More importantly, I wanted to take this opportunity to wish you and your families a very Merry Christmas and share my hopes for a prosperous and safe New Year.

Over the last couple of weeks, we have discussed why we were positioning portfolios to participate in the traditional year-end “window dressing” rally. Such is also known as the “Santa Claus” rally.

As we discussed in “Will ‘Santa Claus’ Visit Broad & Wall:”

“Stock Trader’s Almanac explored why end-of-year trading has a directional tendency. The Santa Claus indicator is pretty simple. It looks at market performance over a seven day trading period – the last five trading days of the current trading year and the first two trading days of the New Year. The stats are compelling.

‘The stock market has risen 1.3% on average during the 7 trading days in question since both 1950 and 1969. Over the 7 trading days in question, stock prices have historically risen 76% of the time, which is far more than the average performance over a 7-day period.'”

The statistics are very compelling. As Ryan Detrick noted this week:

“Whether optimism over a coming new year, holiday spending, traders on vacation, institutions squaring up their books before the holidays—or the holiday spirit—the bottom line is that bulls tend to believe in Santa Claus.”

However, it is worth noting that on more than a few occasions when “Santa visited Broad & Wall,” the bull market didn’t continue in January.

A Review Of Negative Januarys

Let’s review the years in which January failed to carry through from the “Santa Rally.”

The first two examples, 2001 and 2002, were in the midst of the “Dot.Com” crash, so that we can write those off to a bear market. The same goes for 2009.

However, 2010 is a bit different as the economy had started a recovery, earnings growth was strong, and the Federal Reserve was amid QE-1. Yet, January had a -3.7% rate of return following the “Santa Rally.” Other than the “Haiti Tsunami,” there was no other major event causing stocks to decline except “exhaustion” after a 10-month uninterrupted advance.

In 2013, January also posted a negative return. The concern of the “fiscal cliff,” as the comprise to lift the “debt ceiling,” required a bipartisan group of Congressman to find $1 Trillion in budget cuts. Their failure to find cuts triggered an automatic set of cuts across agencies. Fed Chairman Ben Bernanke launched QE3 a month before to offset the impact of the “fiscal cliff.” However, given the cuts never materialized, the Fed’s flood of liquidity caused a surge in stocks over the rest of the year.

The beginning of 2020 also posted a negative January return following an incredible rally in 2019. More like 2013, the market’s extension was extreme with a near-record number of stocks above their 200-dma. The market needed to correct before continuing its advance to all-time highs in February.

January 2021 has a lot of similarities to both 2013 and 2019. With the Federal Reserve continuing QE and a near-record number of stocks above their 200-dma, and an extreme bullish bias, the risk of a correction exists. A government shutdown, stalled stimulus bill, or a surge in virus cases could do the trick.

SPX Weekly Chart
SPX Weekly Chart

The Grinch That Could Also Steal Christmas

As discussed in Wednesday’s “3-minutes” video, there is a potential “Grinch” that could also “Steal Christmas.”

Much of the equity rally this year has been supported by the decline in the USD. Currently, foreign inflows into U.S. equities are near a record, along with net-short positioning on the dollar. (Note previous record inflows.)

US Equity Inflows
US Equity Inflows

Such is the perfect environment for a sharp reversal in the dollar from deeply oversold conditions. Notably, over the last few days, we have seen a positive turn in the dollar. While still too early to definitively say a turn has occurred, this is something to watch very closely.

USD Index Daily Chart
USD Index Daily Chart

As shown below, the decline in the dollar has been a contributor to the equity rally. With money flows now turning positive, a counter-trend rally will potentially reverse the equity bid.

UUP Daily Chart
UUP Daily Chart

Of course, if dollar flows do indeed reverse, we would also expect to see a bid in Treasury bonds. Such would also get support from foreign currency reserves moving to higher-yielding alternatives compared to other global bonds.

TLT Daily Chart
TLT Daily Chart

While we expect the “Santa Claus” rally to ensue over the next few trading days, there are risks heading into January. As noted, there are occasions when investors have received a “lump of coal.” With current market dynamics more similar to 2013 and 2019, this may be a year investors wind up on the “naughty” list.

A Record High In Overvaluation

SentimenTrader had a great post out this past week, with some more data showing the more extreme overvalued conditions in the market currently.

“Sentiment and valuation go hand-in-hand. One impacts the other and creates a self-reinforcing loop until something happens to break the cycle.

Over the past 40 years, there have never been more mild, moderate, or severely overvalued companies within the S&P 500.”

Bubbles Are Psychological

What is essential to understand is that excessive bullish sentiment and overvaluation are the two required ingredients for a “bubble.”

“Since stock market ‘bubbles’ are a reflection of speculation, greed, and emotional biases; valuations are only a reflection of those emotions.”

However, it isn’t just P/E’s showing elevated valuations but virtually every conceivable valuation metric used in finance.

“Psychology” breeds “overvaluation,” which is the very essence of a market “bubble.”

Portfolio Positioning Update

Okay, I said this would be short.

With the “Santa Claus” rally officially kicking off next week, we are maintaining our long bias with reduced hedges at the moment. During the past week, we added to our energy exposure on the recent pullback and some of our “momentum” trades we took profits in previously. We are still maintaining our S&P Index position through next week.

Once we get into January, depending on the state of the stimulus bill, government shutdown, and market levels, we will likely begin reducing risk and hedging portfolios accordingly.

The evidence is mounting quickly that economic and earnings data will likely disappoint overly optimistic projections currently. Furthermore, investors are too confident. Historically, such has always turned out to be a poor mix for a continued bull market advance in the short-term.

We will continue to trade accordingly, but the extreme deviations in all markets from long-term fundamentals are unsustainable.

That is a problem the even the Fed can’t fix.

All I Want For Christmas Is A Bull Market
 

Related Articles

Anna Coulling
Where Next For Tesla? By Anna Coulling - Nov 26, 2021 1

In the pause point of celebrating Thanksgiving and a four-day weekend, I thought it would be a good time to review some stocks and have decided on the daily chart for Tesla...

All I Want For Christmas Is A Bull Market

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Luis Angulo
Luis Angulo Dec 27, 2020 6:17PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The populism on América. Printing Money the easy way
Top Quark
TopQuark Dec 27, 2020 1:46PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Best New Years message I got. Good article.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email