Santa Came to Broad and Wall, But Sentiment Still Must Fall
The market has rallied off of last week's lows, but sentiment never turned down enough to call this a meaningful bottom.
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Note: This is my final column of 2024. I will be back on January 2nd. Happy New Year!
There seems to be much confusion because I keep showing these oversold conditions, yet sentiment never really got so bearish. Both can be true.
Did folks get bearish? No, I don’t think they did. Do I think they backed off from their too bullish views? Yes, I do.
Did we get oversold? Yes, we did. Are we still oversold? I think we are, or at least we’re not yet overbought.
For at least a month now, my view has been that we should pull back in early December and then enjoy a Santa Rally. The indicators are what guided me, not the calendar. I find seasonality patterns are great–if my indicators line up for them. Otherwise, I don’t much care where we are in the calendar. I have seen us make highs the first day of January and I have seen us make lows on a Friday in August. Gasp!
My view on the Santa Rally has not changed. I think we are in the middle of it. Using my indicators—not the calendar—I peg us to get overbought again a few days into 2025.
The Overbought/Oversold Oscillator ought to get itself back up over the zero line before we get overbought again. But as I explained when we got as oversold as we did in the fall of 2023, I expect this to be more akin to what we saw then—see those three trips down to an oversold condition. It need not be three, but I expect this will not be the only trip down here in the next few months.
Why can’t it be as it was in March of 2023? It can. But March of 2023 was the Silicon Valley Bank disaster and we saw sentiment get bearish in a hurry, something we did not see this time. This time we saw some shuffling.
There has been quite a bit of damage done in almost all areas outside of technology stocks and that needs time to repair itself. A plunge like August was also accompanied by a major change in sentiment. Thus far I have not seen a major change in sentiment. And that typically means there is more work to be done.
Take a look at the MDY, an etf to be long mid-caps, everyone’s new favorite group. That plunge in the spring of 2023 (the SVB disaster) saw the ensuing months with work being done (red box). The aforementioned fall of 2023 might look as if it didn’t do work, but that decline is those three oversold readings on the Oscillator chart above, eventually showing a higher low on the third trip down (a positive divergence). And sentiment was really bearish on that last leg down.
Or even the entire first half of 2024 looks like work being done, doesn’t it? There is the April plunge and a lot of sideways work for the next six months (blue box). So why should this be different?
And if you think a Santa Rally isn’t going to push those who shuffled away from the bull camp right back to it, then I’d take the other side of that call. I’d say if we can keep the rally going until the second week of January, the bears will be silenced once again. And that is how we can come back down again.
