Mid-week market update: Another day, another sideways consolidation price action in the S&P 500, which is typical of seasonal pattern in the first half of December.
Beneath the surface, I am seeing numerous signs that the market is still poised for the year-end rally.
Supportive sentiment
First of all, sentiment models are supportive of the bull case. It’s astounding to see that the TD-Ameritrade Investors Movement Index, which measured the exposure of the firm’s clients, become more bearish after a 8.5% S&P 500 rally in November.
These conditions were confirmed by fund flow data, which saw a surge into money-market funds that brought assets to a record $1.3 trillion.
I recognize that the Commitment of Traders data is stale by a week, but the latest report shows that large speculators, or hedge funds, are still net short S&P 500 futures in the face of the rally.
The market is climbing the proverbial wall of worry.
Supportive price action
The stock market experienced a deGraaf breadth thrust last Friday, which is defined as the percentage of S&P 500 stocks at their 20-day highs rising above 60%.
If history is any guide, this should lead to higher stock prices in the coming days.
The bond market, whose reversal sparked the latest risk-on episode, is still behaving well.
Market breadth is broadening out, which is a constructive sign of healthy rotation, which is positive for the bull case.
As well, risk appetite indicators are confirming the market advance.
Tactically, stocks are overbought and it may be helpful for the percentage of S&P 500 above their 20 dma to retreat from above 90% down to 70% (bottom panel, red line).
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclaimer: Long SPXL