Santa has returned to the North Pole

Posted by Cam Hui -

Mid-week market update: The last day of the Santa Claus rally window closed yesterday, and Santa has returned to the North Pole. But he left one present today in the form of an intra-day all-time high for all the good boys and girls who ever doubted him.
 

 

Tactically, today’s rally may be the last hurrah for the bulls. 

 

 

Sentiment warnings

I have been writing about the extended nature of sentiment readings for a while. The Goldman Sachs sentiment dashboard has been stable and elevated for at least a month.

 

 

It is said that while tops are processes, bottoms are events. Excessively bullish sentiment have a way of not mattering until it matters. Deprived of the its seasonal tailwinds, the stock market is increasingly vulnerable to a setback after a period of prolonged frothiness. Mark Hulbert reported last week that his Hulbert Stock Newsletter Sentiment Index is in its 92nd percentile, which is a severe cautionary signal.

Consider the average recommended equity exposure level among the short-term market timers the HFD tracks. (This average is what’s reported by the Hulbert Stock Newsletter Sentiment Index, or HSNSI.) Recently the HSNSI was higher than 92% of daily readings since 2000. In fact, this recent average exposure level is close to being just as high as it was at the bull-market top in February 2020.

The TD-Ameritrade Investor Movement Index (IMX) has returned to a new recovery high, indicating a high level of retail bullishness.
 

 

As well, S&P 500 Gamma exposure is in the top 0.4% of its history. For the uninitiated, gamma measures the degree of exposure option dealers have to the market. The combination of a positive gamma and rising market forces dealers to hedge by buying stock, and vice versa. These nosebleed gamma readings are warning signals of frothiness, which are usually followed by market corrections.
 

 

 

Bearish catalysts

Notwithstanding the scene of protesters storming the chambers of the US Senate, what else could derail this rally?
 

One candidate is a negative surprise from the Jobs Report due Friday. Market consensus calls for 100K new jobs, but the pace of deceleration is becoming alarming. Oxford Economics has a negative estimate, which would be a shocker.
 

 

Today’s ADP miss of -123K compared to expectations of a gain of 75K is consistent with the negative NFP print thesis.
 

 

High frequency data shows that economic activity has fallen off a cliff, not just in the US, but in most advanced economies.
 

 

The Citi Economic Surprise Index, which measures whether economic data is beating or missing expectations, has been slowly fading indicating a loss of macro momentum.
 

 

To be sure, these slowdown effects are temporary. But the pace of vaccinations could be an emerging negative for Q1 and Q2. The market has already discounted the widespread vaccination of the population of developed economies by mid-year. Logistical difficulties with vaccine rollout could be a source of near-term disappointment and spook risk appetite.
 

 

For the last word, I offer this tweet from SentimenTrader.
 

 

While I remain long-term bullish, short-term equity risk is rising. The market can stage a 5-10% correction at any time. Subscribers received an alert yesterday that my Inner Trader had stepped to the sidelines. This is a time for caution. 
 

 

64 thoughts on “Santa has returned to the North Pole”

  2. Not sure what good this comment will do, but I will offer it as a compliment to your recent assessment of your short term suggestions and the hope that it will spur you onto better ….: After reading the above and saying to my wife (who has been told of your recent suggestions) that I sold IWM last night after your most recent suggestion and today it is up 4 percent, she said “get rid of him.” Please try harder. Maybe be more moderate with the “trader” suggestions.

  3. i concur. lowered long exposure at close today.

    With rising interest rates and all the election instability, I found it difficult to hedge for risk without a premium. The gap on the 30Y certainly changes things.

    1. My wife has.
      If the Friday jobs is bad…then, either the market shrugs..one of those bad news is good..because we get more stimulus.
      Sentiment…only, sometimes the herd is right, and it just keeps going. But yeah if sentiment is extreme it could be cautionary.

    2. My daughter got her first shot on 8th Dec and second on 30th Dec, so she was amongst the first in the world.
      She’s a nurse here in the UK, so I’m obviously delighted that she should now have some immunity.
      Her specialist hospital unit has been temporarily scaled back to redeploy people to Covid care for next few months. Keep taking care, folks..

  5. On a day where a new record number of Covid deaths was reported, and the US Capitol Building, with Congress in session to certify Electoral College votes, was overrun by an actual seditious mob during regular trading hours, the markets ended up on the day. Wow, just wow. If this crazy day wasn’t enough to deliver a down day it makes me think we have further upside here. Maybe we run to ~3800 tomorrow and then get clipped on Friday? I have been running one step below my maximum investment policy stock allocation for several months now and would welcome a correction to use as an opportunity to bring this up to the maximum as we near the end of the chaos of the trump era, and in anticipation of this being a great year in the markets.

    1. The ‘chaos’ of the Trump era was/is entirely manufactured by legacy media and the Democrats.

      Months and months of the Democrat Party paramilitary (BLM/Antifa) rioting and we don’t hear a peep out of the Biden bootlicker.

      Tearing down statues. Meh.

      Looting. Meh.

      Antifa murders. Meh.

      ‘Mostly peaceful.’

      https://www.realclearpolitics.com/video/2020/05/28/msnbcs_ali_velshi_downplays_riot_in_front_of_burning_building_mostly_a_protest_not_generally_speaking_unruly.html#!

      1. I think Jarad was referring to “investment related uncertainty surrounding the Trump presidency, that may or may not have resulted in temporary market volatility” – thanks for reminding us that words need to be chosen carefully.

        1. That was exactly what I meant Jan, well said. re-reading my sentence I don’t think the follow-on political diatribe was warranted from that. At any rate, back to reality – 3800 hit! perhaps more upside yet today…

  6. Will the weak economic outlook for the very near-term really be enough to offset the additional fiscal stimulus that is likely to come over the next 2 years? This is not how the market has been reacting in the recent past, I see no compelling reason why it should change now that additional catalysts have come into play.

  7. Today is a classic day of what I’ve been saying since the Vaccine day when markets shifted from Growth to Value. The Growth sectors are exhibiting the above behavior Cam describes and will likely perform accordingly but I believe the Value sector is in the early stages of a bull market. It’s only been two months since the Vaccine Day liftoff. Value was consolidating for five months since June before that.

    Historically, before let’s say the last five years, Value and Growth corelated to a large degree but now they act very differently. Portfolio managers’ performance has been more and more determined by their Growth/Value tilt and this became the focus. The dynamic went too far and is being correctly right-sided over the next period, my guess nine months to a year.

    The SPX is so weighted to Growth that analyzing it as a Growth vehicle could work simply because the Value weighting is so low. But as far as making money, in my opinion an investor should look at Growth and Value independently and abandon the misleading S&P 500.

    Today, Bank ETFs, a key Value sector went up 7% when Technology was basically flat. Mines and Metals did the same. The Value groups did great all around while Growth sputtered.

    Is Value overvalued and at the end of a long bull market uptrend? No. We are only two months into a Value bull from the November 9, Vaccine Day which radically increased the business prospects of these economically sensitive companies. The vaccines are dramatically more effective and coming so much sooner than expected. In a zero interest rate world, Value stocks have cheap PEs on Covid depressed earnings and high dividends.

    I do see amazing amounts of frothiness in Growth areas of IPOs and bubbly sentiment in Growth sectors after a long runup since the beginning of 2019 and a moon-shot for the FAANGs from crash low. They could certainly be closed to or at a peak. But I see Value, at the same time, climbing a wall of worry as previously burned portfolio managers shift more towards it.

    In a Central Bank zero interest rate world with bond markets falling as rates rise, managed portfolios will stay in stocks and simply shift from one group to another. I say analyze Growth and Value separately to profit from the differing dynamic.

    1. One might ask, what about small caps that index is going up more than the SPX. Here is a chart of Small Cap Value and Small Cap Growth. You will see Growth was the big performer from the peak of the market in February but since the Vaccine Day, Value has pulled the Small Cap Index higher. Note that the Small Cap Value index just broke out to a new high in a very bullish pattern when Growth didn’t.

      https://refini.tv/396Lwbj

      If one was to buy Small Cap, which would you choose?

      1. Just checked my ETF research site and VBK, the Small Cap Growth is trading at 46 PE on 2021 future earnings (76 X on current) with a 0.5% yield whereas VBR, Small Cap Value ETF, is at 17 PE on future earnings and a 2% yield. I rest my case.

    2. Ken,

      Thank you very much for sharing your thoughts regularly. As you say, the shift to Value / Small-cap has just begun.

      Need frequent reminders from you to stay Long in these sectors to get the most bang for the buck!

  8. Reopening a few positions where I can find attractive or reasonable entry points.

    BABA/ FXI/ EEM.

    3. Personally, the key to playing the market at all-time highs is to find and use any and all supportive/helpful psychological niches. Kind of like spotting finger/toeholds while scaling a cliff.

      What’s helpful to me this morning?

      (a) Knowing I caught a break on Monday (buying into the midday selloff), which allowed me to add +1.1% to the portfolio on Tuesday. The positive start to the year greatly mitigates any regret I might have about leaving gains on the table Wednesday and Thursday – ie, I’m really not that far behind.

      (b) Taking positions in sectors which have yet (for whatever reason) to participate in today’s rally. BABA/EEM/FXI/VEU all good examples of that.

      (c) Waiting for pullbacks on sectors I regret having let go on Tuesday – XME, for instance.

      The key is to work a little harder at putting something together – the way most of tackle a bad day at work.

    4. XLE here. My psychological edge reopening on strength? Well, I’ve made several round trips on this thing over the past two weeks.

    11. Also EFV (international large-cap value). These plays are all off of Paul Merriman’s site.

      Reopening VEMAX at the close.

    12. Adding to QS here. I’m trying to build a LT position, but I’ll need to wrestle with my tendency to take ST gains when I have them.

  9. Re the jobs report, here are my thoughts.

    (a) I may be wrong, but it seems a negative ‘surprise’ is now the consensus.

    (b) Amidst all the negativity, the indices keep plowing ahead. Price action trumps all else.

    (c) There is now better than an outside chance that the SPX hits DeMark’s target – at the last minute!

    1. Sometimes we just need to turn off the news and watch the price action.

      I realize sentiment levels are high. On the other hand, momentum and breadth levels are also high. Feet to fire, I would have to give momentum the benefit of the doubt – the moves tend to last longer and take prices higher than we’re able to anticipate.

  10. The final 15 minutes of the trading session often leads to some of the most difficult decision-making of the day. Why? Because I’m locked into closing prints when trading mutual funds, and for my work-related accounts I’m restricted to trading mutual funds. I went through the process of switching the accounts to what Fidelity labels Brokerage LInk accounts, which then expands my options to any mutual fund offered by Fidelity – but ETFs and individual stocks are off-limits.

    So what looks good?

    (a) VTIAX (the Vanguard fund equivalent of VEU).
    (b) VVIAX (Vanguard large-cap value).
    (c) VTRIX (Vanguard International Value).
    (d) VEMAX (Vanguard emerging markets).

    I’ll be opening a 29%/29%/29%/13% mix of the above at the close.

    Today was a great reminder that being caught uninvested on a day when markets gap up doesn’t have to translate into being left behind – we just need to find the right niches. I’ll end the day +0.27%, which is actually a decent gain.

  11. I believe the Santa claus rally was a little delayed this year because of the Georgia runoffs. Now there is increased clarity on the political front and the market rallied on that. Next thing we need clarity on is the South African virus mutation, which according to UK health experts may be immune to the vaccines and potentially even be more difficult to detect by current PCR tests.

    2. It may come down to man vs virus each year, as it does with the influenza virus. I think the fact that global scientists were able to successfully develop/produce vaccines to SARS-CoV-2 in record time in 2020 will change the game going forward.

  12. DeMark is already halfway to his target. The pain trade right now (especially following the -500-point plunge in the DJIA on Monday) has to be a +100-point rally in the SPX on Friday. Is that likely? The pain trade is never ‘likely.’ It’s simply a possibility that materializes against all odds.

  13. There’s an incredible global rally underway. The Kospi up another +2.2%, the Nikkei up another +1.45%, Singapore up another +1.2%, Taiwan up another +0.8%.

    It’s probably time to consider the bear case.

    1. How is that bearish? Kospi is up because Samsung reported great earnings and Hyundai in talks with Apple about EV. Taiwan is a semi proxy and Micron reported great earnings plus semis remain in short supply everywhere. Nikkei has a number of bullish stories, Sony selling a lot of PS5, semis and chemical suppliers seeing strong demand, Toyota seems to have a strong position in solid state battery technology, Takeda will soon have more data on a new Covid antibody treatment. I could go on…

  14. Well, Pfizer just reported about an hour ago, that the BionTech stuff works against 16 different mutations tested.

      1. Closing all positions in XME for a loss. There’s too much pressure on metals/mining today – I’ll revisit at a later date.

    1. Whether or not we close at the highs – today comes even closer to feeling like a blowoff top.

    1. It may be time to start thinking about the other side of DeMark’s predictions – the downside.

  19. +1.75% ytd.

    Whereas the Monday/Tuesday trade was mainly a lucky break, I worked hard finding positions/entries for the Thursday/Friday trade.

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