Wise Owl Trading

 Will there be a SANTA RALLY

The Stock Trader’s Almanac explored why end-of-year trading has a directional tendency. The so-called Santa Claus indicator is pretty simple. It looks at market performance over a “7” day trading period the last five trading days of the current trading year “2020” and the first two trading days of the New Year, “2021”. These trends and 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.

 So. should we chase and follow Rudolph’s red nose given the high probability of higher prices by year-end as under performing fund managers “window dress” portfolios for annual performance reports? As noted in there is a 76%-win ratio for the SPX-500 between the 15^th of December and the first week of January and an 24% chance it will not...still the longer-term market dynamics are supportive of a rally into January, So, why am I overly concerned about a “Santa Rally” normally I would not be so concerned if the markets had not already rallied into more extreme levels. (The weekly chart of the SPX-500 index is pushing into more and more extreme overbought conditions now but can certainly get more extreme.) The monthly chart of the S&P 500 index shows more clearly just how stretched markets are getting. While none of these indicators by themselves indicated that the market will correct tomorrow, next week, or even next month, it does suggest investors have harvested most of the “low hanging” market “profit” fruit. 

Interestingly Analysts on Wall Street have been busy upgrading the price targets on their stocks that have reached their 12-month targets within 4-6 weeks. Strategists tend to work from the top-down analysts from the bottom-up. From both directions, I find that Wall Street is extremely, and I mean extremely optimistic. And far too many investors are overly confident that nothing can derail this rally.  What I do know: “momentum” is a “tailwind” for investors. The hope for a real workable “vaccine” that is very-effective allowing the economy to return to normal (like flipping a light switch 😊) with another stimulus package looming is this a reason to be extremely optimistic.