Is S&P 500 Hunting for 4850 by Year End?

If you’re looking for a fundamental reason this market should go higher, good luck. The data is so mixed right now. Yes, earnings are up, but so is inflation. Way up. The Fed is changing its tune about interest rates. So change may be on its way. You can basically make the case the markets will go up or they’ll go down. Pick your flavor. But if you look at the technical signs, the market says it wants to go up.

That’s not to say it’s a guarantee the markets will go up (because let’s face it, the market has a keep sense of humor and irony about that stuff). But if you look at the market’s behavior — the recent volatility spike, drop, and bounce-back — the behavior suggests this market is hunting for 4850 by the end of the year.

There are only 14 trading days left. That’s not a lot of time.

If history is any indication, this week could be the push. Next week is shortened by the Christmas Holiday. The last week of the year is typically pretty slow as the window dressing and tax losses have been harvested and bonuses mostly calculated. So… a lull until January.

All this is to suggest the Santa Claus rally could still happen. The futures markets are showing a soft but positive open for Monday. The set-up looks like the SPX could push as much as two percent higher this week. The extreme for the SPX could touch 4900, though that looks to be a bit of a stretch. But 4850 is looking like a decent bet (maybe 60/40 odds?).

The week’s pivot point will likely be Wednesday when the FOMC provides updates on interest rates, tapering of quantitative easing, and the like. Typically this produces some volatility intra-day. The market expects a taper though. It’s the language that’s the key — transitory is gone from the inflation language — but what will replace it?

Rising rates isn’t necessarily the problem for the markets. Markets often rise with rising rates – because rates rise as economic strength increases and the Fed wants to tamp things down. The bigger may be the dissonance between the Fed raising rates while Congress is simultaneously trying to dump more stimulus into the economy.

It’s a bold dichotomy. On the one hand, an infrastructure spend, in theory, helps increase economic output. That should be good for markets. On the other hand, ‘human’ infrastructure sounds like a fancy way of relabeling welfare spending, which may have a dampening effect on the labor force. Not so good for the economy.

We’ll have to see where the longer-term outlook for this market lands. 2022 looks to be an interesting year. As for the end of 2021 though? Stick to the nice list and let’s hope that Santa Claus rally manages to materialize!

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