With the S&P 500 still shooting for a 3800+ print in 2020, the Santa Claus Rally looks like it’s still on.
It may sound crazy, but volatility could continue to decline in the near term as markets slowly grind higher into record territory. There simply isn’t a significant amount of news between now and the end of the year that looks like it will derail this thing. And mean reversion is likely not reason enough on its own to lead to much more than some intra-week down trading days during a broader trend higher.
(Did that make sense? Basically, the market seems to want to go higher, but on any given day some trading could lead to a negative print here or there. It just doesn’t look like much more than that: trading. The secular up-trend still looks strong.)
This is not to say black swans don’t exist. And this is not to suggest the markets could not find a reason to get fickle and decline. (They could and certainly have before.) It’s simply looking at the data, the trends, and trying to gauge the amount of uncertainty the markets are trying to contend with.
The trick is, most of the contingencies looks like up-side surprises. With much of the country still quite locked down, the questions are more about whether or not additional stimulus is going to happen. Taxes and other policy changes are still taking a back seat for the rest of 2020. (But don’t you worry, we’ll get a chance to freak out about that stuff in Q1 of next year.)
So, at least for now, it appears most of the current negative news in the world is already priced in. That leaves more positive surprises than negative in the short term, hence the high probability the markets grind higher from here.
The number to watch on the S&P 500 continues to be 3800. The downside support area looks like 3644. If this level fails to hold, the 3600 level could be tested.
A close below 3600 for the week would likely end the rally for 2020 and set up a test of the 50-day moving average and a sideways trading range for the rest of the year. The odds of this occurring look relatively low at this time.
A look under the hood of the BigFoot Database shows the DJIA just got a new buy signal. This means the S&P 500, DJIA, and NASDAQ all have buy signals in the system. The database itself is almost 85% long, with almost 85% of those long positions having buy signals (the others are wait signals). In short, volatility is on the decline, and stocks have been on the rise. Unless something surprising happens, Santa Clause should still be coming to town!
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