Mid-week market update: The S&P 500 ended the seasonally positive Santa Claus rally window down -0.1% this year. According to Wall Street lore, this foreshadows a weak year for stock prices.
But did investors really miss Santa Claus this year? The Dow, the equal-weighted S&P 500, the NYSE Composite were all positive during the SCR window. Moreover, the S&P 500 made an all-time high the day after the window closed.
I have always been uncomfortable with the SCR as a predictor of the remainder of the year. While price momentum might work in the short run, it’s hard to believe that the returns of a few days at the end of the year and the new year foreshadows stock returns for the rest of the year. If so, why would the returns of these short windows not forecast future returns in other parts of the year? Why the turn of year effect?
Mark Hulbert demonstrated in a study that debunked the Santa rally effect.
Instead, here is what I am watching.
Broadening Breadth
The most constructive development of the past few weeks has been the growing evidence of broadening breadth. The equal-weighted S&P 500 is starting to perform better against the cap-weighted S&P 500, indicating breadth improvement.
Breadth has improved to such an extent that 12.5% of stocks recently reached 52-week highs. A historical study with a small sample size (n=7) saw strong short-term returns that peak in about a month, which is consistent with the expected effects of price momentum.
I remain constructive on stock prices. My base case scenario calls for a short-term peak at the end of January or early February. I will be watching for excesses in sentiment and signs of an overbought market.
Key risks: Looking ahead, investors will face several sources of short-term volatility. Investors will see the December NFP report Friday, and there are hints that the Supreme Court will announce its ruling on the challenges to the IEEPA tariffs Friday at 10 ET. From a geopolitical perspective, widespread protests in Iran and the Venezuela situation continue to simmer in the background.
Cam: The mag 7 constitute 30% of the S&P 500. It is difficult to see out size gains or movements until they regain their footing. As a trader I am more interested in shorting the Nasdaq as opposed to going long the S&P.
If you look at the relative performance chart of Mag 7 and SPEW to SPX you will see that they are flattening out. Mag7 is no longer in a relative uptrend. Probably too early to short, IMHO.