For all the pain 2020 has caused, it looks like there may be one more gift this year: a Santa Clause Rally?
Let’s skip the suspense of fundamental musings – after all, none of us can predict the future. instead, we’ll look at the quantatative data. What’s it suggesting may play out?
The technical pattern unfolding under this market is showing surprising strength. First, all but the DJIA indexes have regained their buy signals in the BigFoot system. This suggests volatility is on the decline (and perhaps uncertainty as well).
The individual signals on the indexes are a positive sign, but a look under the hood of the BigFoot system reveals even more news. Currently the system is monitoring over 11,700 positions, and over 83% of those positions have long signals. About 2/3 of the long positions have buy signals. And the number of buy signals has been increasing throughout November.
The increase in buy signals in the BigFoot system reflects declining short-term volatility in the system. This makes sense in the larger context of the markets. November may outpace August for monthly gains.
Looking ahead, it seems unlikely the markets can maintain the pace of November for the end of the year. However, the technical pattern suggests the month of December can be positive and move higher from here.
There is a lot of underlying strength in a number of trend lines. The 50, 100, and 200 day moving averages are all positive. Linear regression trackers are all positive. The slope of the quarter, month, and weekly trading trends are all positive. In short, there are very few trend-tracking data points a computer algo can use to get bearish right now.
Some analysts may suggest the market is over-bought here. While the data does imply this, (we’re over one standard deviation above the last month’s trading range now) there are other influences that need to be considered. First, the upward move has a lot of technical trend strength. This pattern indicates we could extend higher for several weeks, remaining in the over-bought area for longer than expected.
Second, the sequence or returns – with August being strong, September and October being weak, the November being strong again – have enough wide swings to again throw off many trading algo’s. The patterns just don’t quite conform in the short-term.
It’s the intermediate term that looks promising. It’s long enough to show a positive pattern, but short enough not to look much past Q4-2020. It even makes a little sense.
Between now and the end of the year the fundamental story is promising. With the Georgia Senate race undecided, the most extreme Biden tax plans are on hold (assuming the Senate doesn’t flip blue). So markets look to the end of the year, with a stimulus-friendly administration walking into the White House, and a likely Covid vaccine rolling out soon. Both of these should bolster market sentiment for a few more weeks given no additional data. And neither should change the Fed’s policy approach.
Then there’s the untold story. It’s the end of the year. Many Wall Street analysts pegged 3800 as the number for S&P 500 2020. And bonuses are on the line. (So the cynic in me is watching for a rally to make sure those traders and analysts hit their holiday bonus numbers).
Of course, it is 2020. So literally anything could happen. Earthquake? Volcano? Ice age? At this point, only the boldest of us would rule anything out. But, statistically, the outcome looks positive. So, at least for now – for December – some hope remains that we can finish strong.
S&P 500 going to 3800 is still not out of the cards for the year. For the week, it looks like a slow start, with futures suggesting a negative open. This wouldn’t be surprising after last week’s Thanksgiving-shorted trading session. Once traders re-position a bit for the home stretch of the year, we’ll see if markets don’t find some traction.
So be good boys and girls. We’ll see if the market brings a present for the end of the month, or if 2020 delivers another lump of coal.