First the good news. Using history as a guide, it looks like the major indices should finish what has been a crazy calendar year in fine fashion. According to data from Fundstrat, when the S&P 500 is up between 10% and 15% between January and November (the S&P 500 sported a year-to-date gain of 12.1% as of November 30th), the index goes on to post a gain in the month of December as well. As in 100% of the time. Nice.
Granted, the data are from bull market periods only. And while bear markets can and have recently come out of nowhere (I’m reminded of December 2018 here), you’ve got to like the odds of stocks rising during the final month of the year, right?
The bad news is that just as investors had become comfortable with the idea that stocks are discounting better days ahead for the economy and earnings thanks to highly effective vaccines that are coming soon, the children in Washington DC started to bicker again.
In case you missed it, at least part of the impetus for Tuesday’s rally was the headline that a bi-partisan emergency relief bill worth about $900 billion was being proposed. Yes, you read that right, a bi-partisan deal. You know, a plan that was cooked up by members from both sides of the aisle. I don’t know about you, but I for one, was pleased to see some cooperation in Washington for a change.
But then, of course, Mr. McConnell threw cold water on the day by saying that such a deal had no chance in his Senate. And as you might expect, headline-reading sell programs kicked in tout suite. Although the indices managed to finish the day with solid gains, the intraday action should act as a reminder that volatility hasn’t gone away.
So, it appears that we may be back to a deal-or-no-deal environment where stocks rally on the hopes that additional stimulus is on the way and fall when the politicking kicks into high gear. Super.
Yes, the economy will likely survive if a deal doesn’t get done before January 20th. However, Jay Powell has been pounding the table for Congress to help support the economy. And with JPMorgan, Moody’s Analytics, and Goldman all saying that GDP is likely to fall in Q1 and/or Q2, the thinking is that a little support from Washington might help cushion the blow while we wait to get vaccinated.
Now let’s take a look at what our Early Warning indicator board tells us about the near-term outlook…
The State of the “Early Warning” Indicators
A quick glance at the Early Warning board tells you everything you need to know about the current state of the market. Well, from a near-term, early warning perspective, that is. Cutting to the chase, stocks are overbought and sentiment has reached extremely positive levels (which is a negative). As such, the table appears to be set for the bears here. The question of the day is if our furry friends will be able to do anything with the setup.
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR.
Last week, I wrote that the key question was whether or not the market would be able to move into what I call a “good overbought” condition – where stocks get overbought and stay overbought during a lengthy rally phase. Based on the stochastics, it looks like stocks may indeed be entering a “good overbought” condition. However, we should expect to see this thesis tested in the near-term. And with stocks opening lower this morning, such a test may be starting. As such, how the market finishes the day could become a key “tell” about the next couple weeks.
All the best, David D. Moenning Investment Strategist
At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none – Note that positions may change at any time.
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