Is a Santa Claus Rally Coming to Town This Week?
These holiday-time rallies tend to be self-fulling, but expect increased volatility, speculative trading and end-of-the-year positioning.
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The primary question this week is whether conditions for a "Santa Claus rally" are favorable. A Santa Claus rally — typically seen at the very end of December and very early January — is driven by a combination of tax moves, positioning for the new year, portfolio markups, and positive holiday vibes.
As many investors are finished trading for 2024 and ready to enjoy the holidays, volume is likely going to slow, creating conditions for speculative trading and increased volatility. Also, we've seen some highly volatile action over the last few weeks that has created good technical conditions for a rally. In particular, most of the market outside of the Magnificent Seven tech stocks has been in a downtrend since Thanksgiving. We finally saw a bounce on Friday, but most of the market has been under severe technical pressure for a while. That sets up the potential for more bounce action around the holidays, especially if there is some profit-taking and rotation out of the Magnificent Seven.
In addition to a Santa Claus rally, another phenomenon that often occurs at the end of the year is a bout of profit-taking in some of the big winners. Not everyone is worried about taxes, and some folks prefer to lock in their profits and start with high levels of cash when the calendar rolls over.
My game plan for this week is to look for some short-term volatility to trade in secondary stocks and longer-term buys in stocks that are likely being dumped for tax losses. There is a long list of stocks near 52-week lows that many folks will want to remove from their holdings and may be good bounce candidates after the pressure is removed. Some of these stocks deserve to be dumped, but there are quite a few that are promising once the overhand is gone.
We have mixed action on Monday morning, and there will not be a lot of important economic news to deal with. The market was surprised by the increased hawkishness from the Fed, but that is not likely to be a big issue during holiday trading.
At the time of publication, DePorre had no position in any security mentioned.
