Computerized Trading Might Mark the End of Santa Claus Rallies
After an end-of-year stock market rally failed to materialize for the third year in a row, seasonal tendencies might be a thing of the past.
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Despite a robust Monday session led by small caps, the S&P 500 fell just short of a positive holiday window.
It was a solid day for the S&P 500, but not quite good enough to produce a positive Santa Claus rally. The rally period ended at the bell on Monday, and the S&P 500 finished just a few points short of delivering a gain for the window, which covers the last five trading days of December and the first two days of January.
This marks the third year in a row that Santa has failed to deliver. I suspect this is a function of higher levels of computerized trading and AI applications, which tend to front-run well-known seasonal tendencies like the Santa rally. Traders are working so hard to position themselves early that they end up destroying the obvious technical patterns.
Nonetheless, it was a positive day, with 68% of stocks advancing and strong speculative action. Small caps led the way with a gain of 1.6%, while the S&P 500 rose 0.6% and the Magnificent Seven gained 0.8%. The action felt a little frothy in places, with 280 new 12-month highs, but the close was soft as late profit-taking kicked in.
Weakness in Apple (AAPL) and big pharma — specifically Eli Lilly (LLY) — held the indices back. Additionally, the biotechnology sector was hit hard early on but managed to bounce back, closing down about 1%. I suspect there was profit-taking and rotational action within the group ahead of the J.P. Morgan Healthcare Conference, an event that often triggers volatility in the sector.
The good news is that there is plenty of positive price action in individual stocks. While the market has been rather chaotic and inconsistent lately, it didn't feel quite as random on Monday.
Even if we don't build on this strength immediately, there is promising chart development providing a solid foundation as we head into the fourth-quarter earnings season and the Federal Reserve's interest rate decision at the end of January. I feel optimistic about overall market conditions, but it has not been easy to put new money to work lately. I'm going to stay patient and avoid pushing too hard as things continue to develop.
Have a good evening. I'll see you in the morning.
At the time of publication, DePorre had no positions in any securities mentioned.
