The little boys and girls on Wall Street are disappointed. The widely predicted Santa Claus rally never happened. The S&P 500 finished the typically bullish period of the final five trading days of one year and the first two trading days of the next year down about 50 points.
Granted, that’s less than a 1% move. And, by itself, it’s nothing to get all worked up about.
But, as the financial television talking heads have told us so many times over the past two weeks, if the stock market falls during this typically bullish period it’s often a bearish sign for stocks over the next year.
Of course, over the past several weeks we’ve pointed out numerous other reasons to be bearish on the stock market in the months ahead.
So, Santa’s “no show” doesn’t come as a surprise to us.
It’s Not Time to Short Stocks… Yet
But, before we get all ramped up and ready to short stocks for 2025… the market is set to rally in the short term.
Let me explain…
The PMOBUYALL is a momentum indicator that fluctuates between zero and 100. When it gets to zero, most of the fuel for a large decline has been used up. Traders should look to buy stocks into any additional weakness.
When the PMOBUYALL hits 100, most of the fuel for a rally has been used up. Traders should look to sell stocks and/or establish short positions into any additional strength.
Like most momentum indicators, PMOBUYALL is not an exact timing indicator. It merely tells us when stocks are in the ballpark of a reversal. We can then look to other indicators (like divergences) to fine tune the timing of trades.
The following chart of the PMOBUYALL can help explain why, even though my intermediate- and longer-term outlooks for the stock market are bearish, stocks are nearing a short term rally phase…
The PMOBUYALL dropped as low as zero five times in 2024. All five times this happened the S&P 500 was near a short-term low. A rally started each time the MACD turned higher when the PMOBUYALL was in this condition.
The PMOBUYALL hit zero about two weeks ago. It has been stuck on the zero line for several days. Now, the MACD indicator is starting to turn higher.
If the current situation plays out like the five previous situations did, then we should see a decent rally get started any day now.
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My guess is the S&P could gain 100-140 points in just a few days – just to work off the current oversold conditions and push the PMOBUYALL back up towards 100.
Once that bounce plays out, then we can look to establish short trades on overbought/overvalued stocks in anticipation of a deeper correction sometime in the first quarter.
Best regards and good trading,
Jeff Clark
Editor, Market Minute