Santa Said Risk On (But for How Long?)

It’s been a fantastic rally for stocks over the past couple months as Santa Claus was coming to town. Now is where things get interesting.

As discussed, last week was really the last full ‘trading’ week of the year. With the Christmas and New Year’s Holidays happening mid-week you can count on lower trading volume for the rest of the year. And more than likely, the participation will be light (don’t want to mess up those bonuses for portfolio managers).

To top it off, news on the ‘trade war’ is positive this morning as China says they’ll reduce or eliminate tariffs on a number of goods in the new year in anticipation of an inked trade deal in the near future.

This news has been greeted with optimism in the futures markets as the major indexes appear poised to push to even higher all-time highs. What a (calendar) year for the stock markets! (I’m sure we’ll get a pile of statistics to chew on in the coming days and weeks – best market since 2013, etc etc).

But before you pop the cork and celebrate, a word of foreshadowing: on the technical front, this market is way over-bought (at least by metrics we typically track). And on top of that, the multiple on earnings has crept up pretty high.

Fortunately, word on the street is still pretty skeptical. But we’re seeing Wall Street pundits raising estimates and there is a lot of chatter from the retail investor about how great things are (even if they’re still nervous about the economy going into an election year).

It’s precisely these times one should be careful about getting sucked into emotional euphoria land.

Warren Buffet famously said you should be fearful when people are greedy, and greedy when people are fearful.

Well, this is a tricky spot. The major indexes have had huge moves in 2019. The temptation to chase performance and pile into big winners is like a Siren’s call for many. And the technical set-up is concerning as we’ve seen this market not only gap higher late last week, but it’s poised to do so again at today’s open.

We’re at two standard deviations above the 21-day trading average for the SPX. Based on the futures markets, we’ll go even higher that that this morning.

It’s no guarantee that the markets pull-back from here just because we’re over-bought… or in a shortened trading week… or because we’ve had likely two price-gaps higher in the last two trading days… or because we’ve had huge calendar-year profits for the year… or because traders want to start positioning for Q1-2020… or a host of other reasons…

But you get the idea… markets have a lot of reasons they could pull-back from here. If they don’t, it may be time to start revisiting Warren Buffet’s old saying again. Because if there’s no fear in this market, maybe there should be.

Then again, for you BigFoot users, this is exactly why we have a process instead of just using our gut. Sure, there are no guarantees in the world. But having a systematic approach to analysis and following a set of rules and rationales leads to more consistent behavior. That means fewer variables, and higher statistical predictability. Or, said another way, it helps reduce the potential for human errors by quarantining some of the emotions that often lead to poor decisions. So tell a friend – or if you’ve stumbled upon this blog for some other reason, give us a ping. We’d love to walk you through the system and show you how to put the power or both artificial intelligence and neural networking to work in your investment process.

Looking pretty over-bought here
There may be further to go, but the air is getting pretty thin up here

As a head’s up, next week’s blog will be pretty minimal. As is the norm for this time of year, I will spend some time pulling together data and doing annual projections for 2020. I will probably do a brief year-in-review snapshot as well. It’s pretty easy though – markets exceeded my expectations because earnings exceeded expectations. It wasn’t a major miss (I had a high for the year at 23% return – we’re currently around 27% on the SPX), but I was surprised to the up-side. Now that I think about it though, should I even say this? Don’t want to jinx things in the last few trading days of the year…

Thanks for continuing the read these musings. I hope you have a wonderful holiday seasons, a Merry Christmas from my household, and a Happy New Year as we step into 2020. May you as blessed as I have been…


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