Where’s Santa?

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By Keith Schneider and Donn Goodman

The Holidays are here!

Investors anticipate the phenomenon that not only happens around most National Holidays, but especially during the Thanksgiving to Christmas season called “The Santa Claus Rally” on Wall Street.

This effect typically happens around December and retail investors wait with anticipation to take advantage of this “seasonality.”

Why Does This Occur?

There is no definite reason, but the best educated guesses assume these factors make up this effect:

• Big Institutional investors take time off leaving the markets in the hands of retail investors who take advantage of lighter volume and a more positive influence.
• Holidays in general have a more optimistic tone and retail investors can see that in the market’s cycles.
• Tax considerations are often already factored into the market in November and early December leaving the holiday period for one without these considerations (and selling)
• Retail sales for the holidays are more robust and that leads investors to believe the economy is doing well (or better).
• Companies pay out year-end bonuses and profit sharing contributions. Individuals also do more year-end retirement planning and many of these reasons mean more money may be flowing into the stock market.
• Individuals, more than institutions, are looking ahead to the New Year with optimism and want to get a head start on next year’s financial goals.

Will It Happen This Year?

It very well could and with 2 weeks left before the beginning of the New Year, we may get a rally. So far, December 2021 has been a dud as far as Holiday rallies are concerned. But do not despair, we could get a very robust, rip-roaring rally yet. However, as most of you know, most of our indicators have not broadcasted this. In fact, our indicators (gauges) have been saying the opposite. Something does not smell right.

What Is Happening Now?

Lots of crosswinds. Inflation, COVID (Omicron), a Fed that appears to want to tighten (or at least taper), a potentially slowing economy, sky high multiples on many growth stocks and concern about what the financial markets in 2022 might bring.

This has led to one heck of a down week, but the most interesting thing to counter all the negatives is that Cathy Woods ARKK ETF had a nice bounce on Friday and could be a lead indicator that the selloff might be overdone. This is countering the Risk Off reading showing short term relative strength in Value stocks (VTV) versus Growth (VUG). (For more on this check out Mish’s interview on stock charts)

We lay out the Big View scenario as follows:

Bullish/Risk On

• SPY remains the only index still in a bull phase, and maintaining support at the 50-day moving average
• The only symbol in Mish’s Modern Family that is still in a bullish phase is Semiconductors (SMH)
• ARKK (Cathy Woods biggest ETF) bounced strongly on Friday, closing positive for the week, diverging from the NASDQ 100 (QQQ) which was down over -3% for the week.

 

Bearish/Risk Off

• Risk Gauges have backed off to Risk-Off
• 3 of the 4 key market indices weakened this weak and suffered declining market phases
• IWM closed right at its 6-month calendar range low, a crucial support level that needs to be held to prevent further selling
• QQQ has the worst volume patterns of the major indices with 3 distribution days and only 1 accumulation day over the past 2 weeks
• The pattern of risk-off was obvious through watching sector rotation, with Consumer Staples (XLP) and Utilities (XLU) up over 1% on the week while Semiconductors (SMH), Technology (XLK), and Consumer Discretionary Spending (XLY) were all down -4% or more
• Sentiment readings show the number of stocks within SPY above their 50-day moving average has slipped below 50%, potentially signaling additional vulnerability
• Market Internals are showing weakness, with the McLellan Oscillator showing negative values on SPY, and the Hindenburg indicator showing 20 omens, the most omens seen in years
• Cash index (VIX.X) held levels that we highlighted last week and bounced, showing potentially more downside for the market
• Value stocks (VTV) are now leading vs. Growth stocks (VUG) after 6 months of underperforming, a risk-off indication
• Gold (GLD) momentum has improved and is attempting to confirm above the 50-day moving average next week, with Friday’s close above the 200-day moving average in the meantime

 

Neutral Metrics

• Given the surge of the Omicron variant, one clear market reaction was a +4.9% performance on the week by Biotech (IBB)
• Treasury Bonds (TLT) are still stuck in the same trading range that started in late June
• Soft Commodities (DBA) is still holding on to a bullish phase, stabilizing on a weekly basis relative to the SPY and could be basing out for a much bigger move
• Foreign equities have underperformed US equities
• The Turkish Lira continues to tumble (USDTRY +18.3% on week), with inflation soaring above 21% annually
• Despite the selloff in the Dow Industrials (DIA) on Friday and its breakdown beneath the 50-day moving average, it has still outperformed the market on a relative basis

 

Crypto

• Bitcoin (BTC) saw daily closes below its 200-day moving average on Friday and Saturday, but seems to be maintaining support at its 50-week moving average with $50-$52k as the nearest bullish price target
• Avalanche (AVAX) is the hottest large cap defi coin this week, up 46% after bottoming at $79
• Ethereum (ETH) is currently attempting to re-establish support at $4,000, and is still maintaining a long-term trend established in July 2021
• Solana (SOL) also saw a strong 19% recovery this week. Announcements from famous celebrities like Michael Jordan and Melania Trump about the launch of their new Solana based services/NFTs brought a lot of mainstream attention to the defi coin