Allocation Action Rocks the Market, Setting Stage for Trading Opportunities
After the market was hit with historically bad breadth, mis-pricing could lead to some good trades.
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The main focus of market participants near the end of the year is a Santa Claus rally, but there is another end-of-the-year tendency that isn't as enjoyable. That tendency is large-allocation moves by large retirement funds to adjust the relative holdings of equities and bonds. That allocation action hit the market on Friday, and it wasn't pretty.
According to Jason Goepfert, it was the worst breadth in the last three trading days of the year for the NYSE since 1962. Overall market breadth was only 1,850 gainers to around 8,000 losers. The biggest loser was the Russell 2000, with a drop of 1.4%, while the DJIA held up a bit better with a loss of 0.8%.
Those are big losses, but the main reason that breadth was so poor is that this is mainly selling indices and index ETFs to change the relative exposure to equities. Typically, funds would be rotating into bonds, but bonds didn't do that well either, with the 20+ Year Treasury Bond Fund losing 0.85% and finishing at its lowest point in 2024.
The most important thing to know about this action is that it isn't particularly meaningful. It isn't a trend or a major shift in market character. It is just one day of repositioning, and now that it's mostly done, stocks will act differently in the future.
The good news is that the action causes some mis-pricing, and there may be some good trades as things revert when all of the end-of-the-year games come to an end.
Have a great weekend. I'll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
