With the market now back to oversold conditions and redemptions complete, it is now or never for the traditional “Santa Rally.”
If we go back to 1990, the month of December has had average returns of 2.02% with positive returns 81% of the time. Over the past 100 years, those numbers fall slightly to a 1.39% average return with positive returns 73% of the time. Statistically speaking, the odds are high that the market will muster a rally over the next couple of weeks.
However, given the volatility of the recent decline, any rally that does ensue will likely fail at the current downtrend resistance. As I discussed in detail recently, the underlying dynamics of the market are substantially weak and, on a longer-term basis, are more akin to market peaks than the beginning of new bull market advances.
While the short-term trends are indeed still bullishly-biased, the longer-term analysis (monthly) reveals a more dangerous picture emerging. As shown below, the market is currently exhibiting all the same traits as the previous two bull-market peaks. Price momentum is deteriorating, participation waning, and price advances stalling.
Both the short and long-term moving average indicators are registering sell-signals for the first time since early 2008. However, it was several months later before the monthly moving average cross-over occurred. For many, by then, it was far too late to react.
While this time could certainly be different, there are many similarities that suggest it won’t be:
- Federal Reserve tightening monetary policy and extracting liquidity from the markets.
- Economic data weakening
- Profit margins deteriorating
- Valuations elevated
- Leadership waning
- Breadth narrowing
- Junk bond yields spiking
You get the idea. These issues, and many others, all point to a very late stage market cycle that potentially ending.
is a chief portfolio strategist and economist for Clarity Financial. To read more of his commentary, CLICK HERE NOW.
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