Santa Claus rally, or round number-itis?

Mid-week market update: As the Dow approaches the magic 20,000 mark, the question for traders is: Will Santa Claus be coming to town this year, or will the market advance stall as it catches “round number-itis”?


Here is what I am watching.

Risk appetite

Risk appetite metrics are mixed. Fixed income risk appetite, as measured by junk bond performance (top panel), remains in an uptrend with a series of higher highs and lower lows. On the other hand, the relative performance of small caps (middle panel) and high beta vs. low volatility (bottom panel) have not achieved new highs, though they have not turned down to form a negative divergence. Score this indicator as positive to neutral.



I am much indebted to Callum Thomas for his analysis that showed that the stock market is tracking its bullish seasonal pattern. If history is any guide, the market will see a final price thrust into year-end.


For another perspective on seasonality, Jeff Hirsch observed that the DJIA has historically risen 66.7% of the time between option expiration (last Friday) and the December year end for an average gain of 0.83%. The corresponding statistics for SPX are 61.9% success rate and 0.84% gain; for NASDAQ 66.7% success rate and 0.86% gain; and 81.0% success rate and 1.82% gain.


In addition, sentiment readings remain supportive based on Callum Thomas’ Europhiameter:

Another weird and innovative indicator, the “Euphoriameter” attempts to capture the level of euphoria (or otherwise) in the market. It looks at forward PE ratios (higher = more euphoric), the VIX (lower = more euphoric), and bullish sentiment (self explanatory!). The VIX and bullish sentiment measures are 12-month smoothed to give a clearer signal and capture the key trends over the longer term. The main point is that it’s starting to surge after a dive down last year, but is not quite at levels of euphoria that would be considered irrational exuberance as such.


Bullish sentiment is rising within a positive momentum backdrop, but readings are not at a crowded long yet. There is more room for stocks to run.

The message from gold

As confirmation of my equity bullish outlook, here is another from an intermarket, or cross-asset, perspective. Gold has been one of the asset classes that has shown an inverse correlation with stocks. I have written in the past that gold and gold stocks did not appear to be ready to rally (see Too early to buy gold and gold stocks), which would be a signal of likely equity weakness. Sentiment analysis from Mark Hulbert confirms this view, Hulbert observed that gold timers have been turning bullish in the face of bullion weakness. In short, gold bulls have yet to throw in the towel on bullion, which is contrarian gold bearish and therefore equity bullish.


VIX Index

Finally, the market has been experiencing a momentum surge that has been accompanied by a series of “good overbought” RSI readings. One cautionary signal that these advances may stall occurs when the VIX Index falls below its lower Bollinger Band. While that hasn’t happened yet, this is something I am monitoring closely.


When I put it all together, I have to give the bull case the benefit of the doubt for now. My inner investor remains bullish on equities. My inner trader is cautiously positioned for a year-end rally with long positions in SPX and RUT.

Disclosure: Long SPXL, TNA

5 thoughts on “Santa Claus rally, or round number-itis?

  1. The dip in the indexes was the day before and the day after the Fed rate hike. Yellen’s statement was much more hawkish than expected. The fact that the indexes are quickly shaking off that bad news and hitting new highs (DJIA and Bank Index over, SPX very close and R2K closing in) is very bullish. That was the pull-back that everyone wished for and likely missed. If they all break into new highs, FOMO will rule.

    Here is a quote from Ray Dalio, top portfolio manager in the world, “The switch from the policies of Obama to Trump may be as profound as the UK’s shift to Thatcherism the late 1970s, or China’s embrace of capitalism in the 1980s.”. Bill Miller is ultra bullish and even Prem Watsa the perma-bear has turned positive. I trust these folks judgement. This market has longer term legs regardless of the short term zigs and zags.

    The only thing that will kill this bull is a big run up in interest rates. Here is a chart with moving averages for the 20 Year U.S. Treasury Bond ETF (symbol TLT). It has a line of the price the day before the Fed hike. I’d love to see ETF stabilize. I watch the chart daily. Cut and paste the link somewhere and you can track its progress too.

  2. As usual I would like to add a caution to the above thesis. There is a broad consensus building on two ideas: (1) The fear of missing out on this rally. Let us look out under the hood. Most of the gains in the Dow have come from three stocks CAT, GS and HD. Fear of missing out.

    (2) Trumponomics is good for the market. Whatever that is. His political and economic position are fluid at best.

    Reminds me of July when there was a consensus that Interest rates would never go up as the Central Banks controlled the markets. Well, the losses today after Trump nomination are greater in the Bond Market and the Emerging Markets than the gains in the US stock market.

    Markets are very stretched. VIX is testing historical lows. The Bond Market and Gold Market are heavily shorted. The surprise then will be: Dollar down, Bonds up(yields down), Stocks down and Emerging Markets up.

    I think the risk in the market is not interest rates going up which I agree with Ken will be the nail in the coffin but the Political Risk and Trump’s trade policy. Here is an extract:

    The Trump transition team described Mr Navarro as a “visionary economist” who would “develop trade policies that shrink our trade deficit, expand our growth, and help stop the exodus of jobs from our shores”. While the Navarro appointment will certainly raise eyebrows, the move to create the new office is also likely to be seen as controversial by mainstream economists, many in the business community and pro-trade Republicans. Targeting the trade deficit is seen by many economists as likely to lead to protectionist trade policies. It may also be complicated by Mr Trump’s plans for an increase in spending and rising interest rates, both of which have already yielded a surge in the dollar that is likely to make US exports less competitive and would normally lead to a bigger trade deficit.

    The trend is your friend till it is not. We have seen what happens when everybody wants to exit at the same time. For people who don’t remember the Market was locked limit down the night when Trump won the election. The Dow was down 800 points if my memory serves me right.

  3. Thank you, Cam, for another well-researched and reasoned article.

    Rajiv – “Trumponomics is good for the market. Whatever that is. His political and economic position are fluid at best.”

    You’re very polite. When people speak of Trump as if he’s competent and stable, I just repost some of his tweets or the compendium of lies that the Toronto Star has cataloged ( It reaffirms, for me in any case, his clear lack of emotional stability and his disconnect from reality. I think we’ll all be getting familiar with the term “narcissistic personality disorder” in the near future.

    The idea that we might “bring jobs back” when more jobs have been lost to automation than to export of factories is delusional. Any company that replaces a foreign factory with one domestically will be building its good with robots, not out-of-work formerly middle class voters with high school diplomas.

    1. I detail my concerns and the bear case about the Trump administration this weekend. Stay tuned.

  4. Rydex funds is showing 20:1 bull to bear ratio at present. This indicates extremely one sided market (long only). One could use the broken down VIX index as a proxy. One asset class that I saw this was in the US real estate market circa 2005. Everyone including Alan Greenspan, Realtors and their dogs were touting US real estate as the best investment where one could not loose money. Everyone knows what happened thereafter. As an aside, most of these real estate agents lost their shirts and licenses to sell real estate. From some metrics, the Trump rally is showing similar extreme bull market in optimism. Recent results from Nike and Fedex could be a tell. I am watching what Trump is able to deliver not his rhetoric. If he delivers, the market could start another leg higher with TNX closing in on 3%.

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