Santa Claus Will Likely Call, but in the New Year, Perhaps a Fall?
We're nearing an oversold level that could set up a Santa Claus rally. But will the first quarter be one for the Grinch?
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Let’s do a quick review of where we are.
As we entered December, the market was short-term overbought. I realize until Thursday the S&P felt like it had no idea we were overbought, but it is essentially trading where it was on the first day of December. Considering how much the Index Movers, or Mag 7 names are up, flat is interesting because even they couldn’t really drag the index much higher.
But let’s forget the index that is controlled by a handful of stocks (and they say the Dow is not diverse enough—heck, those 30 stocks represent a clearer picture of what the majority of stocks are doing than the S&P does). The Dow has been red for six straight days; not only is that highly unusual, long-time readers will know that when it comes to these long streaks of ups or downs, I will always look for them to revert because they have stretched too far. In this case, it is getting oversold.
In the case of the Dow, it has been red for eight of the last nine trading days. That is almost two weeks in the market—the month of December thus far. But look at the chart of the Dow; it has been working this channel since August. Sure it missed tagging the lower line during the early November pullback but that line has been good. We are now approaching it again.
The Overbought/Oversold Oscillator is based on the breadth of the market. Breadth has been red for seven of the last nine trading days and the two up days saw net breadth on the NYSE at +50 and +180 so they may as well have been red. Since the Oscillator is based on the ten-day moving average of breadth, you can see how it is heading toward a short-term oversold condition (with so many red breadth days).
Speaking of breadth, the McClellan Summation Index, which I believe tells us what the majority of stocks are doing, is heading down. It now needs a net differential of +2200 advancers minus decliners on the NYSE to halt the decline. With so many stocks falling, that is bearish but at some point, when it takes a large number to reverse course, we are oversold. In early November, +2300 did it. In late October +3100 did it. If the market is down on Friday this number ought to push toward +3000, making it ‘oversold’.
That doesn’t mean I think the market is in great condition but I did expect early December to see a pullback and some volatility (we did not get much in the way of volatility). I also said I expect we should get the traditional Santa Rally, which you may recall, is not the month of December but ought to start a few days before Christmas and rally for Christmas week. Considering the short term oversold condition I see developing in the next week, I still expect that Santa Rally.
However I don’t plan to fall in love with a rally should we get one because I still expect to see a deeper correction sometime in the first quarter. Something needs to shake out all that bullish sentiment. Just Thursday the NAAIM Exposure number came in at 98.24, the highest since July.
