Was Santa Claus Climax The Bottom?

Santa was right on time this year, but unlike last year’s not stop sleigh ride to record heights, this year he left investor stockings with lumps of coal. The major US stock market indices fell 20% on average into the Christmas day low, with a climactic 4-day plunge of 2,500 Dow points on automated computer selling. The rare absence of a Santa Claus rally has many wondering if there is another lump of coal rolling toward investors that may break the recent low or is the worst behind us? The slowing in China, an unresolved Trade War and near recession levels in much of Europe provide plenty of kindling for fear of recession fires in the US. Reviewing the history of some key technical indicators below offers a more sanguine outlook for 2019. We shared some of these market bottoming charts in late December, but the Holiday timing delayed reporting until stocks rebounded sharply.

The stock market Volatility Index (VIX) is a very complex measure of out of the money put and call options. Essentially when stocks rally the VIX falls. More importantly, when the stock market corrects sharply, the VIX index spikes higher. While there is no magic number, the upper 20’s and higher on VIX typically signifies an important market bottom is imminent. The 28 level on VIX was last breached the day before the Christmas eve 2018 closing low. These volatility extremes are uncommon and worth taking heed and worth taking on more stocks in the portfolio. The only time these extreme VIX readings in the ’30s and higher are grossly premature occur during severe recessions, such as 2008.

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Extreme pessimism by the small investor cohort has also been an interesting indication of significant oversold conditions. The American Association of Individual Investors (AAII) Bull minus Bear opinion spread only moves to negative 25 or lower when the market is near an important bottom. The exceptions occur during Bear markets that are associated with economic recessions (2008). While there are legitimate concerns of a minor recession in parts of Europe in early 2019, we don’t see Yellow Flags yet in the US other than below normal growth rates. Extreme sentiment conditions can register prematurely, but the track record indicates the mid-December level of pessimism was a prudent time to begin investing some dry powder.  

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Disclaimer: This report may contain information on investments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this communication ...

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