Week Ahead: End-of-the-Year Holiday Trading Could Cause Santa Claus to Rally in Stocks, But Risks Looming


  • Markets expect to cruise through the end of the year amid thin holiday trading, but risks loom
  • Defensive stocks outperform
  • Width provides negative divergence
  • The Treasury yield curve flattens

After investors responded positively to the Federal Reserve’s tightening program, as markets head into the final weeks of trading in 2021, one would have expected a stabilization or decline. However, with Omicron at continuing risk, it shouldn’t have been surprising that investors were showing a late reaction to the more hawkish monetary policy of the US central bank.

After Wednesday’s post-rally, when stocks surprised with a rise, analysts argued that the decision to step up bond purchases and raise rates three times in 2022 had already been made for investors. However, on Thursday sentiment reversed and tech stocks led the stock sell-off.

Late reaction or longer term concerns?

Could it be that investors suddenly realized that the valuations of mega-cap tech companies would be under pressure from rising borrowing costs? Given that the stock sell-off continued on Friday, it clearly wasn’t just because of excessive valuations in the tech sector. stocks fell 0.34%, stocks lost 0.4% and stocks continued to plunge, down 0.67% on the last day of trading last week. Only cyclical sectors lost more: tumbled 2% and collapsed 2.2% on the day.

The massive selloff on Friday was mainly due to the quarterly expiration of options and futures. So, maybe the massive sales are over and stocks will now either navigate smoothly through year-end holiday trading or even gift traders with a Santa Gathering for Christmas.

There are, however, some worrying signals.

First, it’s possible that Friday’s liquidation was at least in part brought about by Federal Reserve Governor Christopher Waller, who said rates could increase as early as March as the United States “approaches” the maximum. His comments sent the dollar higher, so perhaps the comments weighed on stocks at the same time.

There is yet another red flag: has shrunk.

While tech stocks have been the main drivers of the string of records set by major US indices this year, only 31% of stocks listed on the are above their respective 200 DMAs, even though the tech benchmark is up 18% for the year. On the other hand, 36% of companies listed on small caps are trading above their respective 200 DMAs.

The shows an even more positive magnitude; 68% of index constituents are trading above their respective 200 DMA. Nonetheless, SPX is exposed to additional volatility since only five of its listed stocks – Apple (NASDAQ :), Microsoft (NASDAQ :), NVIDIA (NASDAQ :), Tesla (NASDAQ 🙂 and Alphabet (NASDAQ 🙂 – are responsible. for around 50% of the benchmark rally since April.

So far, the S&P 500 is around 24% higher year-to-date and continues to move closer to its all-time highs. However, the greatest risk remains with technology stocks listed on the NASDAQ.

Via the monthly chart, it is easy to see the strong negative divergence between the price of the high tech index and the Advance-Decline going back to January 2018. Additionally, we might witness a monthly evening star in the making. If the price falls to its monthly lows, it will have entered midway into the October Candlestick, after the November candle has deepened, producing a Headstone Doji.

There are other signs that investors are avoiding risk.

In the past week, as well as in the previous month, the best performing stocks were all in the defensive sectors. In both periods there were only four segments in the green. On a weekly basis, outperformed, up 2.5%, real estate stocks followed, up 1.75%; gained 1.35% while it rose 1.25%.

For December so far, utilities are up 4.1%; Consumer staples gained 3.6%, followed by real estate 3.25% while health care rose 3.1%.

The Treasury yield curve flattened, another indicator of risk, as the spread between ratings and ratings narrowed.

5A: 30Y UST Daily Spread

5A: 30Y UST Daily Spread

When the economy is viewed as healthy, investors want a higher return on funds spent over longer periods of time. When the yield between shorter and longer-term Treasuries flattens out, it suggests that investors lose confidence that bond yields will reward them for locking up their money for the longer term.

When the curve reverses, with short-term issues exceeding the yields on longer-term bonds, this indicates that the costs of short-term borrowing are more expensive than longer-term loans. This reversal in performance is a sign that something is wrong with the economy. It is considered a leading indicator of recession.

The various reasons for caution notwithstanding, the current market narrative predicts that stocks will maintain their record highs, at least over the next week and even into the week after, amid weak trading. However, volatility levels could increase further.

The amount jumped on Friday after Fed Governor Waller said the Fed’s first hike could take place in March.

Daily Dollar

The greenback could form an ascending triangle that ends with a breakout to the upside.

won on Friday, extending its rally for a second day, despite Friday’s powerful green dollar candle amid the USD’s biggest rise since November 10.

Daily Gold

The yellow metal found support above the bottom of a symmetrical triangle. The direction of the breakout will likely determine the next move.

The advance of gold, even amid the strength of the dollar, is another sign that investors are strengthening their defensive stance.

is down for a sixth straight week, its longest weekly losing streak since December 2018.

BTC / USD Weekly

After falling below its bullish trendline from July low, Bitcoin is at $ 40,000 low, where September and November lows meet the uptrend line from October 2020 low. .

collapsed on Friday, ending a two-day rally.

Daily Oil

We provided one on the WTI last Wednesday. However, if oil rises and breaks above the $ 73 level, it will flip a potential bearish flag (converging and rising red lines) into a bullish (purple) flag as it crosses its downtrend line (dotted) from the November 10. high. Of course, this all probably depends on Omicron’s developments.

The coming week

All times shown are EST

Sunday

8:30 p.m .: China – : the previous fix was 3.85%.

Monday

7:30 p.m .: Australia –

Tuesday

4.30 p.m .: United Kingdom – : is expected to increase to 1.0% from 0.8% mo.

8:30 am: Canada – : likely to drop from -0.2% to 1.6%.

6:50 p.m .: Japan –

Wednesday

2:00: United Kingdom – : is expected to remain stable at 1.3% for the quarter and 6.6%.

8:30 am: United States – should remain unchanged at 2.1% QoQ.

10:00 am: United States – : forecast is expected to drop from 109.5 to 110.2.

10:00 am: United States – : is expected to drop from 6.34 million to 6.50 million.

10:30 am: United States – : likely to drop from -4.58M to -2.082M.

Thusday

8:30 am: United States – : assumed to increase slightly to 0.6% from 0.5%.

8:30 am: United States – : should go from 206K to 205K.

8:30 am: Canada – : is expected to decline to 0.8% from 0.1% MoM.

10:00 am: United States – : should have jumped to 770K from 745K.

Friday

An array of global markets will be closed before the Christmas holidays


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