Last week Santa Claus brought increased volatility and more gain for US indices.
It is too early to think of resuming the short-term trading (because of the holidays) but this might soon change.
We continue to see the building of excessive optimism in the US stock market. The number of call options bought continue to rise compared to the puts. All major indices made new highs. But the Santa Claus rally might lead to a closing of positions in the first days of the new year.
That is usually done by market participants who don't want to incur capital gains. That is why they wait for the new year and then take profits. That usually leads to weakness in January visible in the seasonal chart below (blue line, courtesy of Larry Williams)
Another reason, such down move might happen now is that the current rally reached almost all targets. The last remaining target is around 3290 level.
So we can expect a short-term correction which might provide a good opportunity for new buy signals.
But why to favour the buys? Won't this market fall? It was a huge increase in 2019!
To answer that, we need to look at the market from a long-term perspective.
Let's begin with those big moves in 2019. S&P500 is up over 29% while NASDAQ reached even higher levels with its 36% increase in 2019. That is great news but is not something that could predict a serious decline. Actually, more often than not, a good year is followed by another good year.
To prepare ourselves for the upcoming year, we need to look at the decennial pattern. Developed by Edgar Lawrence Smith it states that years ending in the same digits will produce similar market performance. And if you do the research yourself, you will find that most of the recessions include year ending on 0. That suggests a weakness for the market in 2020 (it ends on 0).
But one final digit cannot lead to a recession on its own. Especially when we have a Federal Reserve which is very supportive. With low interest rates, pumping of liquidity and willingness to take action if something threatens the economy the FED is a key ally to all bulls.
That is expected to continue into 2020 along with more stimuli from the government. Why? Because 2020 is an election year. And as the Presidential cycle suggests it will be hard to see a huge decline.
Look at the chart below, courtesy of Seasonax (www.seasonalcharts.com). It shows the Presidential cycle for DJIA.
What usually happens is that election years start with weakness in January and a range till the middle of the year. Then, in the second half of the year, the uptrend should resume.
Last but not least, my recession indicator is showing a 35% chance of having a recession in the USA in the next 6 months. No matter the fact that this reading is the highest I've seen so far it is still far away from the “danger zone”.
All this suggests that for the US Stock market we should give more weight to buy signals.
I wish you a Happy New Year and all the best in the new year!
See you in 2020 when I'll resume my short-term trading and commentaries.
Founder of Piece of Trading
Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer
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