Late last year as the stock market was taking gas, I speculated on the likelihood of a “Santa Claus” rally, first on November 16 in Stock Market Sentiment Supports a “Santa Claus” Rally, then on November 28 in Santa Claus Speaks. We now know such speculation was premature, as the stock market continued down into Christmas Eve and didn’t begin to rally until Boxing Day. That rally has been ferocious, retracing much of last quarter’s decline. Having been investing for many years, I should know better by now than to indulge in short term forecasting, but the challenge is too tempting to resist.
All along I’ve maintained that this would be and has been a bear market rally, so the main open question remaining was how long it would last. We have some pretty good evidence that it has ended.
It turns on the same breadth argument that we examined in The Crash of 2018 early last October. There we highlighted a divergence between the US market and that of the rest of the world. Over the past few days we’ve witnessed a similar divergence, where the US market has remained within an upsloping trend channel, but the rest has broken down below it. This reflects the world market being increasingly sustained by a shrinking number of large US stocks, suggesting that the trend channel that has so far contained the broad US averages is living on borrowed time.
The US Treasury market has resumed its rally as well, meaning bond investors are pricing in an end to Federal Reserve rate hikes and even possibly cuts in the coming months. Although the Fed has signaled that it’s now more equally biased between hikes and cuts going forward, it’s clear that this is a departure from its earlier hopes of normalizing rates with at least another two or three hikes. This doesn’t happen for no reason. Gold prices have been rallying as well, which generally happens when the markets begin to lose confidence in the Fed’s commitment to the dollar. And it also appears these trends, which I discussed in A Bull Market Is Born, remain in force.