Why the Stock Market May Not See a Santa Rally This Year
Santa Claus may skip Wall Street this year as stocks have been too good.
When Santa Claus hitches up Rudolph for his annual Christmas route this year, he may well skip Wall Street, not because stocks have been naughty but because they’ve been so good.
At least that is the bold forecast among some analysts who believe the market has gone too far too fast.
“My experience is that the market seems to hurt the most number of people that it can so if the consensus is that there is a big rally, there probably won’t be one,” said Ian Winer, director of equity trading at Wedbush Securities. “I think we’ve already seen the Santa rally.”
Santa rally is a reference to the stock market’s surge toward the end of year that typically takes place around Christmas. Predicting that the rally will be a no-show is a gutsy move given that all the pieces seem to be falling into place for the stock market.
Sentiment is bullish, confidence in the economy is improving and earnings are showing signs of bouncing back. The consensus, in fact, points to further gains for equities.
Yet, fears that the market is likely to stumble once it comes off its postelection adrenaline rush persist given the magnitude of the gains since the U.S. election. All three major indexes this week touched all-time highs with the Dow Jones Industrial Average DJIA, -0.04% coming within striking distance of the key 20,000 milestone.
Katie Stockton, chief technical strategist at BTIG, believes that stocks are showing signs of exhaustion. “We would look for a significant pullback to unfold next week as short-term overbought conditions take their toll,” she said in a note.
Still, even though investors may miss out on the Christmas cheer, Stockton recommended investors buy on dips to position for a New Year rebound as the market’s momentum is healthy.
Since Donald Trump’s win on Nov. 8, disbelief had quickly morphed into a feeding frenzy for stocks on expectations that his presidency will herald a new period of growth for the U.S. economy.
“We are seeing levels of excitement on equities like we haven’t seen for years in some cases. New highs will do that,” said Ryan Detrick, senior market strategist at LPL Research, in a note.
The strategist cited the U.S. Investors’ Intelligence survey, which indicated that the number of bulls rose to 59.6%, above the “danger zone” reading of 55% and a decline in cash levels.
A survey by Bank of America Merrill Lynch this week showed that cash holdings dropped to 4.8% in December from 5.8% in October.
Global Fund Manager Survey average cash balance (%)
Source: Bank of America Merrill Lynch
“Fund managers have pushed pause on a risk rally….With expectations of growth, inflation and corporate profits at multiyear highs, Wall Street is sending a strong signal that it is bullish,” Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said in the survey.
Excessive exuberance, at times, may be a sign that investors are getting ahead of the market, according to Detrick. But optimism in and of itself shouldn’t trigger a selloff, at least not this year.
“It could be a potential warning sign, but seasonality and the improving economic data are the two biggest positives for equities in the near term,” he said.
Jeffrey Saut, chief investment strategist at Raymond James, was more blunt.
“Don’t get too cute and try to game the market for short-term profit,” he said.
Saut admits that the “buying stampede” is getting overextended and the S&P 500 could retreat to around 2,200 to 2,230 range in the near term. But he has not given up on the market, forecasting stocks to “grind higher” into at least late January.
Historically, December has been good for stocks and so far the pattern appears intact with the market up nearly 3% in the first two weeks of the month.
“I think the Trump rally will continue well into 2017. The economy is solid and we are likely to get policies in 2017 which will boost growth,” said Torsten Slok, chief international economist at Deutsche Bank Securities. “The main risk is that the economy is already at full employment and hence we are likely to see higher inflation in 2017. But as long as inflation stays under control then the bull run in equities should continue.”
Courtesy of MarketWatch