3 Reasons This Rally Won’t Last

After a couple of rough weeks of sledding, the market rebounded this week. The S&P 500 posted a gain of 3.3% over the past five trading sessions, its best weekly gain since mid-December of 2014. Other indices followed suit. Investors were encouraged by Fed minutes Wednesday where policy makers emphasized that they would raise interest rates slowly and carefully.

I would love to say this is a start of a sustained “Santa Claus” rally, but I do not believe this to be the case. I continue to raise cash as we head into the New Year as I believe 2016’s risks outweigh its rewards at current levels in the market. There are myriad reasons I believe this to be the case.

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Obviously increasing Islamist-based terrorism is a concern that could cause shocks to the market at any time. We have not had an interest rate hike since 2006, so how investors react to that event when it occurs bears watching. And, of course, global growth is currently at lowest levels since 2009; this is a trend I think will continue on into 2016. However, there are three current reasons I believe the rally this week will fizzle.

Narrow Breadth:

A fascinating stat was provided on Real Money Pro the other day. The average gain going into Friday’s trading for the top ten stocks by market capitalization in the S&P 500 was a positive 13.8%. For the other 490 stocks in the index, the average was a negative 5.8% for 2015. This is why most investors when they look at their brokerage and 401K statements are down for the year, even if the major indices are showing slight gains.

More importantly, this sort of narrow leadership almost always occurs at market tops and never at market bottoms. Whether it is the “Nifty-Fifty” of the late 60s/early 70s or the internet boom led by the likes of Cisco Systems (NASDAQ: CSCO) in late 1999/early 2000, this type of narrow breadth rarely leads to good things for investors.

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Alex Filonov 4 years ago Contributor's comment

There is one reason this rally can last: Santa Claus. No, we don't have year-end rally every year, but we do most time. I don't think this year is an exception. I'm not selling into this rally, not until week before Christmas.