All that’s left to do is to wait for Santa Claus

Mid-week market update: Let’s begin with an administrative note. In the absence of severe market volatility, this will be the last mid-week market update until the new year. I plan on taking a few days off at the end of the year. I plan to publish the usual two comments this weekend, follow by single comments each weekend after that.

It’s always difficult to make definitive market comments on FOMC day, as initial market moves are often reversed on the next day. We can say that the bulls were disappointed by the market reaction to the soft CPI report. The S&P 500 rallied up to test the falling resistance trend line but failed. While the bulls fell short of pushing the index about resistance at 4100, the bears were also unable to push the market below support at 3900. Tactically, all that’s left is to wait for the Santa Claus rally.



2022 has been a difficult year for investors. The silver lining is this environment conducive to tax-loss selling. When the tax-loss sales abate, it becomes a setup for the Santa Claus rally, which begins the day after Christmas and ends the second day of the new year.



Santa rally candidates

I can offer two sets of possible sets of candidates that could outperform during the Santa Claus rally window. The first is small-cap stocks. Small caps had been tracing out relative bottoms against the S&P 500 for most of this year. In November, their relative strength faltered and they began to lag again. Their underperformance is probably partly attributable to tax-loss selling pressures.



Another is crypto plays. I am on record that I believe crypto-currencies are nothing more than digital beanie babies. but crypto plays could be washed out here and enjoy a tactical bounce during the Santa Claus rally window. To begin, the recent cover of The Economist is a contrarian magazine cover indicator.



The arrest and subsequent indictment of Former FTX CEO Sam Bankman-Fried in the Bahamas could serve to put a bookend to the latest sorry episode of crypto implosion. While Bitcoin is holding long-term support, the shares of Coinbase (COIN) and Greyscale Bitcoin Trust (GBTC) have violated support. Moreover, the GBTC/Bitcoin ratio continues to decline, indicating further a widening discount. Keep in mind that the astronomical yield level of COIN’s debt is a market signal that in a disorderly windup, COIN common shareholders are likely to be wiped out. Nevertheless, the latest episode of market weakness could be a signal of a market washout that could see crypto-related plays stage a significant bounce.



Needless to say, the crypto space is a high risk/high reward trading opportunity. Size your positions accordingly, (though I am personally staying away).


My inner investor is roughly neutrally positioned against the asset allocation benchmark specified by his investment policy. My inner trader is holding to his S&P 500 short, but expect to opportunistically cover his position before the onset of the Santa Claus rally window.



Disclosure: Long SPXU


15 thoughts on “All that’s left to do is to wait for Santa Claus

  1. An interesting observation from Bespoke…”Next year the FOMC will see its membership change versus this year as four regional Fed Presidents rotate out and four rotate in. Two of the most hawkish FOMC members (Bullard, Mester) will be leaving and one arch-hawk (Kashkari) will be voting on rates. But  two relative doves (Evans, Harker) will also become voters. Evans is set to be replaced next year by former Obama Administration economist Austin Goolsbee, who will likely be somewhat more hawkish than Evans but not dramatically so. Harker has shifted more dovish lately as well and could get much more so next year. The bottom line is that the FOMC is going to get more dovish near based on current stances towards monetary policy. Swings in data and changes in the reaction function of individual FOMC members are more important, but at the margin 2023 will start more dovishly.”

  2. The candle yesterday with this long upper tail, sticking through the resist line, on very high volume relative to recent volumes…must be a classic. The other thing is that we have not had a high volume down spell.
    If you look at the volumes of the SPY, even in the 90s, on the corrections that show as being sizable, like 10%+ moves, they all have relatively high volumes at the bottom. True in 1998 the volumes look small compared to today, but if you look at a 2 year segment around 1998 you’ll see a big spike in volume. The periods around 2000 and 2008 show huge increases. We have not seen that, so the bear in my opinion has not passed, and if we don’t get one, this will be very strange because any dip of 20% or more had a huge surge in volumes at the bottom. Well if Santa comes then we have to brace ourselves for the easter bunny.

  3. What if the Santa rally just pivoted? Or we get a downdraft first? There is support at around 3900, but if that goes and there are stops, how fast and far can we go?

    1. Well, if they run the stops at 3900…I am assuming there are some, then the next support is in the 3700 region, only if we are in a bear we should take out the 3500 low, but we could go sideways for quite a while. For now, I think that the candle we had that spiked up through the resist line and reversed on high volume is a really strong signal. Who bought at 4100 a few days ago is not happy and on the wrong foot . If you look at a 6 month chart on ESmini, the support resist of that line dating back to June is impressive, 8 hits in 6 months. So if it goes, how deep is the elevator shaft?

    2. I wouldn’t rule out 2500 to 3000. If Powell is signaling a terminal rate >5%, AND he further expects the rate to be in that area at the END of 2023 then it may be his way of telegraphing not to expect any rate decreases for the next twelve months.

      1. My immediate concern is if 3900 holds for now. If it does we could bounce for Santa, but if it breaks then I would think 3700 or so is the next support. My thinking is more likely that 3900 does not hold, but at some point there will be a bounce. Maybe we get a Santa rally from 3700 to 3950 and then get a major drubbing in 2023.

        1. Mike Wilson mentioned the break of 3938 would confirm downside, thats what finally happened. It is not unusual to see this kind of volatility ahead of Flash PMIs, but some important support levels seem to have been broken. One could try shorting a retest of last weeks lows and/or this ~3935 level.

          1. I would like to see some downside follow through for it to look real. Then if we get a bounce 3935 looks like a good resist level. But anything is possible. It all depends on what the money does, where it goes.
            Depending on how major a break we get (in sense of Fed breaks something) the pivot may be a pivot or a PIVOT!!.
            Make sure you have your anti nausea pills handy Position size could help.

  4. Persistent selling below the VWAP after the CPI and after Fed rate, plus continuation of selling today all pointed to distribution and trend reversal. We had a delayed VIX reversal from yesterday’s Fed rate and VIX was up 7.99% today. This is the first time since August 2022 that a VIX reversal had resulted in a short signal that broke below the multi-week up trend line and the strategy is now short SPX ES futures at 3922.

    Prior to today’s action, it was still possible to say the bullish up trend is intact, but now it is more difficult for the bulls to say they can stem the selling.

    1. One thing to watch is the volumes. If we are heading down in a serious way then we should run high vols.

    2. There is a gap to be filled from the 11/10/22 CPI rally at around SPX ~3820 or front month futures ES price of ~3850. ES is trading at 3875 currently. There is a small chance that market could form a short term bottom there and rally for the rest of the month. If VIX reversed again and close much lower today, that could be a confirmation of a possible rally – the cyan dots on chart show a developing reversal but it needs to close at the end of day before a signal could form.

      The higher probability is for SPX to sell to a lower base before reversal however, perhaps SPX 3700 to 3650.

      1. Well, I took some profits today like Cam did. I was doubly leveraged so it was a good idea I think. I still have some but most is gone to profitland. I follow the ES mini. Volume today is supportive that we keep going down, but keep in mind that we could be getting a head fake and things could reverse quickly. Volatility goes both ways. It would not surprise me if we get a rally, but looking at the chart, I am looking for a drop to 3800 to 3700 after which a rally back to 3925 would fit nicely. That downsloping resist line drops about 100 per month so by early January it will be more like 4000 than 4100. If we get a rally into the new year, then we could be retesting that line. However if we really are in a bear, and I think we are, then we should expect lower lows ie sub 3500 on the S&P…just not in a straight line a la elevator shaft. Safest bets at this time is shorting on rallies…use a bear etf.

      2. SPX closed at 3852.14 -43.61 -1.12% but VIX also closed negative, -0.96%. The ES futures contract low today was 3855.75 which technically is a gap closed from the high (3856.75) of the prior day of the 11/10/22 CPI rally.

        FWIW, this VIX reversal strategy indicated that VIX is sufficiently negative to trigger a long trade at market open on Monday 12/19/22. This strategy is 62% correct on long trades out of 42 long trades in 2022 and fairly accurately follows the short term trend of SPX based purely on the trend of VIX.

        The SPX market has a tendency to reset and allow longs to rally on the monthly options expiration and triple witching such as what we saw on days following 06/17/22.

        1. Looking at a chart of the VIX and SPX for 2022. A few points, which ofc could be meaningless, but we have had 3 waves down each lasting around 2 months and 3 slightly shorter duration waves up. On the down waves the VIX went to the mid 30s, and when the market rallied the VIX went down to around 19-20. What happened when each wave down in SPX started the VIX shot up to the upper band of B Band and then dipped to the center before rising and mostly traveling in the upper part of the band until the down move was completed. So maybe this VIX action is the same thing happening again. We’ll see. Myself I will keep an eye out for shorting again if we get a bounce in the SPY to the center line of the B band. Every time prices of SPY crossed the 80 DMA was significant, both upside and downside. When it crossed going down, there was a short rally back to the center of the B band..that’s what I’m looking out for. When it crossed to the upside, it only lasted 2 to 4 weeks above , and we are at about 4 weeks now. So my guess is we see weakness for a few days yet before we get a short rally, but this could all be BS. This would fit with a Santa rally starting in a few days that is only a few days duration before collapsing and we head sub 3500. Disclosure, my timing usually sucks. Oddly enough the market does not care about my fantasies.

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