October’s sell-off hit the stock market like an unexpected earthquake.
Before a rally to close out the month, the S&P 500 Index had dropped almost 10%. That would mark the worst month since the financial crisis.
This was the equivalent of an 8.0 on the Richter scale.
And when you have an earthquake, there are bound to be aftershocks.
Last week, the Dow Jones Industrial Average dropped 600 points on Monday. And then on Thursday, there was a 500-point intraday swing.
Investors are still picking up the pieces from last month’s sell-off. If you just went through an earthquake, there’s always the slight chance that another one is imminent.
That fear translates into itchy trigger fingers, ready to sell at the first sign that the market is headed lower.
And that’s what explains all the recent volatility.
Yet with all this current fear and despair, could a “Santa Claus rally” be right around the corner?
Santa Claus Is Coming to Town
Last week, I was interviewed on Yahoo Finance TV about the potential for a Santa Claus rally.
You can watch that interview here:
By definition, a Santa Claus rally occurs in the last week of December through the first two trading days in January.
After Christmas, institutional trading desks are lightly staffed, and hedge fund managers have notoriously used this lack of liquidity to window dress their positions into year-end.
If a Santa Claus rally is expected to occur into year-end, it’s common for other hedge funds to front run this phenomenon. That means the Santa Claus rally starts in early December and continues throughout the month.
Will The Market See a Santa Claus Rally This Year?
There are some positives here.
Earnings have mostly come in ahead of expectations.
The U.S. economy continues to grow at a 3% pace with record-low levels of unemployment and record-high levels of economic optimism.
And short-term interest rates, although higher than two years ago, are still at 2.25%.
What could possibly catalyze a rally into year-end?
Currently, the looming trade war with China is the biggest overhang on the markets. It’s the only thing that matters.
As I penned in June, both the U.S. and China are in stronger negotiating positions than they were 10 years ago.
Both countries have become less reliant on exports. Neither side wants to look weak, and I expected the rhetoric to escalate.
This will come to a head on November 30 and December 1 when President Donald Trump meets with Chinese President Xi Jinping in Buenos Aires, Argentina.
But the lack of preliminary meetings is casting doubt as to whether or not the two leaders can come to a compromise in early December. And this failure to prepare has set the market on a downward spiral in the past few days.
As their respective markets exert pressure on both leaders, this may force a compromise.
The S&P 500 has dropped about 10% from its late September highs. China’s Shanghai Composite Index has fared even worse, down 25% since the highs of January.
The U.S. is set to raise its tariff rate on $200 billion in Chinese goods to 25% from 10% on January 1. With market sentiment readings currently at “extreme fear,” any delay or indication that tariffs will be delayed until further meetings will tip off a massive short squeeze.
And this should be enough to get those FAANG reindeer (Facebook, Apple, Amazon, Netflix and Google) off the ground so hedge fund Santas can rally the market higher into year-end.
Editor, Crypto Profit Trader