The Santa Rally Left Much To Be Desired


Over the last couple of weeks, I have been discussing the potential for an oversold bounce heading into the end of the year. (Better known as a Santa Claus rally.As I wrote:

“Well, I was clearly wrong.

After being good all year, all investors got last week was a ‘big lump of coal.’

The relief that was needed to allow the ‘bulls’ to take charge, at least temporarily, failed to materialize.

This past week was one of the worst December performances on record.”

But as noted, the market did finally muster a bit of a rally last week.

That’s the good news.

The not so good news is that it did little to reverse any of the real technical damage done to the market over the course of the month. The rally this past week was simply an oversold, short-covering, bounce that left much to be desired in terms of commitment. As I noted on Thursday:

“Following the breakdown of the market from its consolidation pattern in October and November, the market plunged 20% from its previous all-time highs. Despite the massive surge in stocks yesterday, all the market managed to do was recoup 2-days of losses.”

“From the previous peak in early December, the market has yet to even achieve a 38.2% retracement of that decline. It would not be surprising to see this rally try and recoup a full 61.8% of the decline over the next several weeks.”

Interestingly, the market retraced exactly 38.2% of the previous decline and failed at important overhead support. With just one trading day of the month left, it is critically important the markets muster a rally, otherwise, we are most likely looking at a retest of recent lows at a minimum, or new lows at the worst.

While I still expect a rally which could potentially reach 2650-2700, the overall market environment remains negative which, for longer-term investors, continues to favor higher levels of cash and fixed income. 

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