Overly Bullish Speculators Front-Run “Santa Claus”

Last week, we discussed the market approaching the 3750 year-end price target we had established back in August. To wit:

“That target was derived when I previously set out several ‘risk/reward ranges.’

‘With the markets closing just at all-time highs, we can only guess where the next market peak will be. Therefore, to gauge risk and reward ranges, we have set targets at 3500, 3750, and 4000.’

I have updated the chart below. The “black arrow” was where I initially did the analysis.”

With the markets currently “knocking on the door,” we will likely reach that target by year-end. Such is particularly the case with the seasonal Santa Claus rally just ahead of us. As we discussed in “Will ‘Santa Claus’ Visit Broad & Wall:”

“Stock Trader’s Almanac explored why end-of-year trading has a directional tendency. The Santa Claus indicator is pretty simple. It looks at market performance over a seven day trading period – the last five trading days of the current trading year and the first two trading days of the New Year. The stats are compelling.

‘The stock market has risen 1.3% on average during the 7 trading days in question since both 1950 and 1969. Over the 7 trading days in question, stock prices have historically risen 76% of the time, which is far more than the average performance over a 7-day period.'”

Chasing The Sleigh

Given the high probability of higher prices by year-end as managers “window dress” portfolios for annual performance reports, we increased equity risk this past Tuesday. We reported the trade to our RIAPRO Subscribers (Free 30-day Trial) at the time of execution.

“Adding 5% of SPY to Equity and ETF portfolios for the end-of-year strength. As noted in both posts below, there is a 76% win ratio for the S&P between the 15th of December and the first week of January.

  • Initiate a 5% position of SPY in portfolios”

As discussed last week, while there is a 76% chance the markets will be positive, there is a pesky 24% chance it won’t.

That Pesky 24%

As discussed in Thursday’s “3-minutes” video, the longer-term market dynamics are supportive of a rally into January,

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