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Posted December 27, 2024 at 12:30 pm
Today is a reminder that just because a “Santa Claus” rally is a statistical likelihood, it is far from guaranteed.
Considering that today was shaping up to be a quiet, uneventful day of holiday-period trading, I’ve been fielding more inquiries than I was expecting. The general question of course is “why the selloff despite the apparent lack of news?” As with most market explanations, the answer can be murky. The best I can figure out is that there are large accounts, pension funds and the like, who need to rebalance their holdings before year-end.
Can I be certain of this? I not been able to confirm first-hand that this is the case. But it is certainly a highly logical explanation. Considering how stock and bond prices have diverged over the past quarter and past, it is highly likely that stocks have become a disproportionately high percentage of a balanced portfolio. Simply put, if a fund desires a 60/40 ratio of stocks to bonds in its portfolio, and the stock portion has risen while the bond portion has fallen, they will likely find themselves with, say, 65/35 or 70/30. Getting back into balance would require selling stocks and buying bonds.
The following graphs show the divergence, using 10-Year Note Futures (ZN) to show prices, not yields (which move inversely):
Source: Interactive Brokers
Source: Interactive Brokers
The intraday trading action certainly suggests that a large seller is active. Note how two successive “buy-the-dip” attempts failed at the 5970 level, and how the second led almost immediately to new intraday lows. That is the sort of action that occurs when a rally attempt is squelched, causing the short-term speculators switch from buyers to sellers.
Source: Interactive Brokers
Unfortunately, there is a flaw in the “rebalancing” theory: Bond prices haven’t been the inverse of stock prices since early in the session. It is possible that the overall selling in bonds remains substantial, or that the funds are simply raising cash. We see short-term rates lower on the day, so it would make sense if the funds raised from selling stocks are being deployed in cash equivalents. Or of course, the sellers may be waiting until their sales settle on Monday.
Source: Interactive Brokers
The following graph shows the disruption to the Santa rally. Both SPX and NDX are trading below the lowest levels of Tuesday’s shortened session, though they are still up for the week. Most consider the Santa Claus rally to begin on Christmas Eve, so it is now no longer a rally. But as of midday we remain higher for the holiday week.
Source: Interactive Brokers
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Higher via short squeeze while the machines are mostly ‘off’ or others caught leaning… tends to not last as long as some of the longside junkies – or passive investors – might prefer that it did. 93% of the market is 10% of the wealth, 50% is the 1%. They are smart money and take profits. Thursday shorts have done well over the last 2 days.
I sold everything because ppl haven’t realized yet the incoming damage of tarrifs, deportations, high interest rates and government cuts. They will learn soon enough. Position 100% cash.
SPX will be 6300 by February.
SPX will be below 5800 first, maybe hit 5500 then rebounce and go higher.
Face “IT” the baby rattles all chewed up. Put your Seat Belt on people.. Days of uttering redundant “All Time High” is now the Inverse. The beauty in this Beast is a slow trickle Down.. that is until the drunkards realize “IT’s” really happening with no FiX. To those that need a picture: 💥