What Santa Rally?

Preface: Explaining our market timing models

We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

 

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)
• Trend Model signal: Bullish (Last changed from “bearish” on 27-Jun-2025)
• Trading model: Neutral (Last changed from “bullish” on 26-Nov-2025)

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.
 

Subscribers can access the latest signal in real time here.

If Santa Should Fail to Call…

The seasaonlly positive Santa Claus rally spans the last five days of the year and the first two days of the new year, and the window opened on December 25. So far, the S&P 500 is trading slightly below the closing price on  December 23.
 

The Wall Street adage was first coined by Yale Hirch, “If Santa should fail  to call, bears may come to Broad and Wall”. Can the market rally on Monday, the last day of the Santa rally window, to rescue the bullish narrative?
 

While the historical record of failed Santa rallies is sobering, it’s difficult to believe that a few days at the turn of the year can have a significant price momentum effect for the rest of the year.
 

Sentiment Warnings

Nevertheless, the market is encountering a number of warnings of excessively bullish sentiment. Bear in mind, however, that crowded long sentiment radings are condition indicators and not actionable trading signals.
 

Consider, for example, that the ratio of leveraged long to leveraged short ETF assets are at a record high. If history is any guide, the S&P 500 has stalled when readings have reached these levels and corrected soon afterwards.
 

The headline from the latest BoA Global Fund Manager Survey reported that manager cash levels are at a record low, which should be contrarian bearish. On the other hand, the same survey shows that manager risk levels are elevated but can’t be characterized as a crowded long.
 

Momentum and Pullback

On the other hand, the stock market is exhibiting strong signs of price momentum. A historical study of price momentum by Nautilus Research shows strong short-term  bullish outcomes.
 

The -0.7% decline of the S&P 500 on the last day of the year was a breadth wipeout and left only 20 stocks in the index up on the day. This has only happened five times in the last three years. If history is any guide, stock prices should recover in the next few days.
 

Technical analyst Tom McClellan also observed that only one stock in the NASDAQ 100 rose on December 31. A similar historical study of the last 30 occasions when this has happened yielded bullish outcomes.
 

The December 31 drop saw the equity-only put/call ratio spike to 0.92 in thin year-end trading, indicating panic and liquidation. This reading is consistent with short-term market bottoms.
 

A Breadth Dilemma

I assess the bull and bear as a tension between megacap tech and market breadth. Magnificent Seven leadership is starting to falter, while the equal-weighted S&P 500 leadership is broadening out, which is constructive. However, the heavy weight of technology and AI-related names within the S&P 500 will prove to be a significant drag should their prices falter.
 

I view signs of broadening breadth to be constructive for stock prices. Both the S&P 500 and NYSE Advance-Decline Lines recently made all-time highs. These are not signs of an impending bear market.
 

I believe that while concerns about an AI-related investment bust is a rising concern, the fundamentals aren’t showing signs of an imminent collapse. A survey of GPU prices of all vintages are rising, reflecting continued demand for AI-related computing demand.
 

As well, NASDAQ 100 insiders are buying their own stock at above average rates. I therefore interpret current market concerns about an AI-related bust to be a temporary hiccup. NASDAQ leadership should resume after a brief correction.
 

In conclusion, a possible failure of the Santa Claus rally is introducing jitters about the strength of the bull in 2026. While excessive bullish sentiment readings are a concern, the combination of positive price momentum and broadening breadth should put a floor on stock prices. My base case scenario calls for a choppy upward path for stock prices in January.