Will the Fed Trigger a Santa Claus Rally?
Conditions are ripe for aggressive trading in the last few weeks of 2025.
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It is widely anticipated that the Federal Reserve will cut interest rates by a quarter point on Wednesday morning. Odds of a cut have been increasing for the past month and have been a tailwind for the market. Concerns about slowing employment have been set aside as investors focus instead on a dovish Fed.
As has often been the case in the past year, the market is running higher into the anticipated positive news. The S&P 500, DJIA, and Russell 2000 (IWM) are all close to all-time highs, while the technology-heavy Nasdaq Composite and Nasdaq 100 (QQQ) are lagging a bit. This setup tends to favor a "sell-the-news" reaction to the Fed decision, but bears have been repeatedly burned in the past year when they look for a reversal to hit.
The problem for the bears is that the sell-the-news reaction is too obvious. Many investors are standing on the sidelines waiting for the inevitable pullback, and then, when it doesn’t occur or is very shallow, fear of missing out takes hold, and they chase a market that bears claim is technically extended and overvalued.
The reaction to the Fed will be the highlight of the week, but there is also an intense debate over the AI sector. Since the earnings reports from Palantir (PLTR) and Nvidia (NVDA) , there has been a reassessment of the health of the group and much more focus on the high level of competition that is developing between hyperscalers such as Alphabet (GOOGL) and Meta (META) .
The AI bubble talking point has shifted, and while there are still general concerns about profitability and valuations, there is now much more focus on identifying individual winners and losers. That is making for more chaotic action in the indexes — but also providing more opportunities for investors who are focused on stock picking rather than the tiresome talk about bubbles.
A third and related issue in play is the rotational action occurring under the market's surface. There has been excellent small-cap strength even though the cryptocurrency group has been acting very poorly. The speculation in smaller stocks suggests that there is strong anticipation of a classic Santa Claus rally in the last few weeks of 2025.
If we consider the reaction to the Fed along with interest in speculative stock picking, then conditions look excellent for some aggressive trading opportunities in the final weeks of the year.
At the time of publication, Rev Shark had no positions in any securities mentioned.
