It’s officially here, but it’s not guaranteed the markets will care.
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Our View
Global equity funds are seeing the largest weekly outflows since March 2020, which is a major stumbling block for the S&P. We knew going into last week that with the $100 billion dollar end-of-year rebalance going on, tax-selling and just about every bank analyst talking about a 2023 recession, that the public has been selling non-stop.
Yesterday I read something that said home sales fell sharply in November and so far in December. Not long ago, the public was sold on the idea that the Fed would soon slow its rate-hiking mission, but the reality is hitting home now that that wasn’t exactly the case.
The S&P
bill of goods that the Fed was going to slow the pace of its rate hikes and now that reality has hit home the S&P has fallen 9.4% in the last two weeks, which is more of a kick in the ass then a year-end uptick.
Our Lean — Danny’s Take
Welcome to the new normal where the S&P rallies 3% one day, then sells off 7% to 10% over the next 7 to 10 days. Ultimately, I don’t care how tough you are, all these wild swings will wear you out. It’s why three-day weekends can be so helpful to traders and we’ve got two of ‘em two weeks in a row.
We live in a “what’s next” trading environment where any number of headlines can hit and drop the Dow down 500 points in a matter of minutes and the scary thing about it is that it’s become so commonplace and no one even mentions it. China’s announcement that it’s going to open up foreign travel into China should be a positive, but we’ll need more than that for the markets to truly change their tone.
According to my good friend Jeff Hirsch of the Stock Trader’s Almanac, the Santa Claus Rally starts today. Here’s Our Lean and some more info on the Santa Claus Rally:
Our Lean: There are 5 trading days left in 2023. To this point, the ES and NQ have been under fire and every rally is sold, while every ‘pop’ has been a dead-cat bounce.
Our lean is to sell the rips and buy the pullbacks. There have been some big drops and pops and that’s not going to change now or in 2023. Too many people are thinking that once the calendar flips to 2023, the markets will flip their behavior. That’s not going to happen — yet.
Santa Claus Rally (SCR) starts today. The Santa Claus Rally was discovered and named by Yale Hirsch in 1972 and published in our 1973 Stock Trader’s Almanac as the last five trading days of the year and the first two trading days of the New Year. This short, sweet rally is usually good for about 1.3% on the S&P 500, but the real significance of the SCR is as an indicator.
It is our first seasonal indicator of the year ahead. Years when there has been no Santa Claus Rally have tended to precede bear markets or times when stocks hit significantly lower prices later in the year. As Yale’s famous line states (2023 Almanac page 118): “If Santa Claus Should Fail To Call, Bears May Come to Broad and Wall.”
NASDAQ and Russell 2000 have logged the greatest frequency and magnitude of gains on the day after Christmas. Since 1988, NASDAQ has advanced 73.5% of the time with an average move of +0.42%. R2K has also advanced 73.5% of the time with an average advance of +0.40%. DJIA and S&P 500 have slightly softer records, but bullish, nonetheless.
Two days after Christmas, the market is less bullish with NASDAQ down more often than up. Three days after Christmas R2K small caps take the lead advancing 64.7% of the time with an average gain of +0.46%.
Looking further out, from 1950 to 1985, the last 5 trading days of the year S&P 500 up 34 of 36 years with an average gain of 1.24%. From 1986 to 2021, it was up 19 of 36 for an average gain of 0.43%.
MiM and Daily Recap
The ES traded up to 3871.50 on Globex and traded 3838 on Friday’s 9:30 futures open. After the open, the ES rallied up to 3854.75 at 9:33 and traded down to 3821.25 at 9:56 and then rallied ~47 points up to the 3868.50 level at 11:40. The wild swings continued with the ES rallying back up to 3870 at 12:45, pulled back down to 3851.75, and then traded up to a new high at 3872.50 level at 3:03
The ES traded 3867.75 as the 3:50 cash imbalance showed $646 million to buy, traded 3871 on the 4:00 cash close, and settled at 3868.25 on the 5:00 futures close, up 20.50 points or 0.4% on the day.
In the end, a consolidation / back-and-fill day for the ES, whether it follows through is a different question. In terms of the ES’s overall tone, it was a choppy back-and-forth trade. In terms of the ES’s overall trade, volume was steady but low at 1.33 million contracts traded. I think it’s fair to say that the markets are weak. Can there be an end-of-the-year rally?
Technical Edge
- NYSE Breadth: 68% Upside Volume
- Advance/Decline: 66% Advance
- VIX: ~$22
S&P 500 — ES
The ES is getting rejected by the 10-day moving average for the second time in as many sessions. There is technically a gap-fill down at 3872-ish. I would like to see that filled and see how the S&P responds.
The Globex high is up at 3900.50. A pushback to that level opens the door for a potential cash-flow short, given the overhead and moving average resistance. If the ES does push through though, 3920 is in play.
On the downside, a break of 3872 without bouncing could put 3845 in play, then 3820 to 3825.
SPY
Keep an eye on Friday’s high = $383.06.
That could be the “go/don’t go” line in the sand today. Above this area opens the door to $386.50 to $388. Below $383 and $380 or lower is vulnerable.
Cash flow trade: If we only open slightly above $383.06, look for a reversal back below this level. It could give us a quick cash-flow short to work with using a tight stop and let us put some money in our pocket quickly on the day.
DE
Not sure if or when we’ll see this, but keep an eye on the $415 to $417 area for DE. There we find the gap-fill + 10-week and 50-day moving averages.
TLT
Yields are on the rise and bonds have been falling. We have taken a couple of very nice passes on TLT over the last 4 to 6 weeks. Pulling back this morning, let’s see how the $100 to $100.75 area holds up.
In that range, we have a notable psychological level, but more importantly, we have the 50% retracement and the (slightly) rising 50-day moving average. If this level fails to hold, we should know pretty quickly.
Open Positions —
- Numbered are the trades that are open.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
- UUP — Ideally needed a close back over last week’s high of $27.95 and we closed AT $27.95. Long against $27.75 is fine with a ¼ to ⅓ trim at $28.15 to $28.25. Ideally looking for $28.40+
- LNG — an official position after another ~$150 tag. $157.50 is a reasonable area to trim ⅓. Feel free to trim ¼ before that though, if necessary, as it’s been a nice bounce so far but still below short-term trends. Stop-loss at $147.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Relative strength leaders →
- LNG — keep an eye $150
- SBUX
- DE — gap-fill & 10-week would be attractive for potential longs
- HON — weekly
- CAH
- LMT, RTX, NOC
- MET — weekly
- GIS
- CI
- MCD — weekly
- ENPH, FSLR, CEG — solar has strength
- VRTX, UNH, MRK
- XLE — XOM, CVX, COP, BP, EOG, PXD (Weekly Charts)
Economic Calendar
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