I received many messages and emails asking my opinions related to the recent market volatility and sideways trending in the U.S. markets. Many traders see the recent downward price trend as a warning of a potential shift in trends. Yet, I see it as normal November volatility in price and wanted to share some data to support my conclusions.
Even though I'm not dismissing some external event, like a sudden U.S. Fed move or some foreign market event, historically, the U.S. markets enter a reasonably strong Christmas/Santa rally phase at this time every year. The increasing volatility usually starts to build in September/October – reaching a peak in October/November every year. December's trends are traditionally much more muted and consolidated.
NASDAQ Trending In Narrowing Upward Price Channel
The NASDAQ continues to trend in a narrowing price channel created by the COVID and post-COVID rotation/rally. Recently, we've seen the biggest volatility breakdown in price take place last August/September. Once October started, the NASDAQ began another rally phase that carried into November.
As November comes to a close, I expect a moderate rally to continue melting price higher that will likely carry into December 2021.
Historical Price Data Paints A Very Clear Picture For Traders
I've pulled together some data using my proprietary price modelling and data mining utility to illustrate these trends more clearly. I've pulled data from the Invesco QQQ Trust (NASDAQ:QQQ) and the SPDR® S&P 500 (NYSE:SPY) to help readers understand what to expect as we move closer to closing out 2021.
Overall, November is usually a moderately volatile month in the markets. I'm providing data from a proprietary data mining tool I use that helps me understand historical volatility and price trends throughout various months and seasons. Allow me to explain this data so you can learn to pull more subtle inferences from it – as I do.
First, the largest monthly POS/NEG (Positive/Negative) ranges show us volatility ranges and general price trending capabilities. The span between the POS and NEG values reflects volatility for any given month. For that month, the strength, or trend bias, should be evident by looking for the largest POS or largest NEG value.
Second, the total monthly POS/NEG values reflect how data was distributed and the associated volatility related to each side of price trends. Larger POS ranges show greater volatility to the upside. Larger NEG ranges show greater volatility to the downside. Additionally, pay attention to the distribution across the total number of months for each POS or NEG monthly totals. These show how dominant trending is or is not.
Last, the total monthly sum values provide some general guidance regarding the strength of trending and momentum likely within each month. Total sum values that are larger than the POS/NEG values indicate stronger momentum trends within each monthly period.
I've broken this data into QQQ and SPY blocks to see how the data differs between these two US major indexes.
QQQ Historical Price Data Mining Results
The QQQ data consists of 23 years of monthly historical data. Allow me to try to share my analysis of this data with you.
- September is generally quite volatile with a predominance of downward price trending overall. In fact, the considerable total monthly sum value shows September can show strong downside price trends closing out the month. September showed 12 NEG months and 11 POS months, so September is basically 50/50 in terms of trend direction – leaning slightly heavier towards downward trending.
- October reflects even bigger volatility and usually closes higher to represent a moderate recovery from September. October's total monthly bars show 15 POS and 8 NEG – showing solid bullish trending potential.
- November shows the biggest historical volatility and usually closes moderately higher overall. This is usually when the Christmas rally begins – where traders expect strong end-of-year bullish trending. November's total monthly bars show 17 POS and 6 NEG – showing very strong bullish trending potential.
- December reflects more mild volatility with continued bullish trending. The POS/NEG values range is much smaller than October and November – yet still larger than September. The smaller total sum value suggests trending is a bit more muted on average but still generally bullish. December's total monthly bars show 11 POS and 1 NEG – showing another 50/50 trending potential, leaning slightly bullish.
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QQQ Monthly Market Historical Data
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September Analysis for the month = 9 October Analysis for the month = 10 November December |
SPY Historical Data Mining Results
The SPY data consists of 29 years of monthly historical data. Let's take a look at how the SPY compares to the QQQ
- September is generally moderately volatile with a predominance of downward price trending overall. The large total monthly sum value shows September can reflect strong downside price trends closing out the month. September showed 15 NEG months and 14 POS months, so September is basically 50/50 in terms of trend direction – leaning slightly heavier towards downward trending.
- October volatility increases more than 40% compared to September for the SPY. The SPY usually recovers almost all of the September losses in October. Notice the range of the POS/NEG values in October reflect a more consistent range than the total monthly sum in comparison to September or November? This suggests that October usually presents a stronger momentum trend – usually closing higher for October. October's total monthly bars show 19 POS and 10 NEG – showing very strong bullish trending potential.
- November shows strong historical volatility, almost on-par with October, and usually closes strongly higher overall. The 114.52 total monthly Ssum suggests the SPY can really "take off" in November at times. Also, the lower value shown in the NEG value suggests downside price pressure is minimized in November. October's total monthly bars show 23 POS and 6 NEG – showing extremely strong bullish trending potential.
- December clearly illustrates a general slowdown in momentum for the SPY. The POS and NEG values range is much smaller than the October/November ranges, and the bias between these numbers is NEGATIVE. That suggests that downside price volatility may be a bit stronger in December – prompting some moderate downside price trends.
Overall, the total monthly sum shows December usually closes higher, though. Continuing the Christmas rally into the end of the year is very common for the U.S. markets. December's total monthly bars show 19 POS and 9 NEG – showing very strong bullish trending potential.
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SPY Monthly Market Historical Data |
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September October November December |
December's Santa Rally Should Become Evident Within 5 To 10 Days
December 2021 should see a solid melt-up in trending unless something happens to disrupt these general historical trends. I expect the markets to settle into early December and to start trending higher in a moderate “melt-up” type of trend – likely moving in (+/-) 0.3% to 1.3% daily ranges. Meaning the QQQ and SPY may rally between 3.5% to 5.5% higher before the end of 2021 if my estimates are accurate.
Traders should start to see a solid price rally form in the QQQ and SPY over the next 5 to 10 trading days. My expectations are a reasonably early start to bullish prices trending in early December. The NASDAQ could target $17,000 or higher, while the SPY may target $495 to $500 before the end of 2021.
The strongest sectors are likely to be technology, consumer staples, retail, real estate and financials.
This rally may carry into, and possibly through, January 2021 and beyond. Stay ahead of these significant trends by following our research.
Near the end of December, I'll publish a follow-up article to this one highlighting what to expect in January, February and March 2022. Stay tuned for more data mining research and guidance.