Stock market technicals suggest investors have next to no belief in a year-end rally — also commonly known as a Santa Claus Rally — said Bank of America chief equity technical analyst Stephen Suttmeier.
“Investors have given up on the December rally. Sentiment shows that tactical contrarian bullish levels of fearfulness are building. The 3-month VIX relative to the VIX triggered a tactical capitulation signal last week and the 5-day total put/call rose above 1.0 for the first time since the 2020 U.S. Presidential Election. In addition, AAII Bearish Sentiment hit a 2021 year-to-date high in bearishness last week,” said Suttmeier in a new research note to clients on Tuesday.
A Santa Claus Rally is one where equities climb higher in the final week of December through the initial two trading days in January. Its precise cause has never been greatly explained — theories range from year-end tax considerations to people spending their fat bonuses to buy stocks to general season effects.
The Dow Jones Industrial Average has returned 2.5% on average in November through December going back to 1896, Hulbert notes. That is above the average two-month gain for all the other months of roughly 1.3%.
If there isn’t a Santa Claus Rally this year, it wouldn’t be a total shock.
Stocks have seen wild swings since Black Friday amid heightened concerns on the Omicron variant and worries about peak liquidity now that the Fed is poised to taper its bond purchases. Despite a powerful two-day rally this week, the S&P 500 is still off more than 1% from its Nov. 18 high. Shares in high-flying tech stocks continue to see tepid buying, notably Tesla which is down 15% from its Nov. 4 high. Salesforce shares have lost 13% from their Nov. 8 high.
BofA’s Suttmeier thinks the stage is being set for a mixed start to 2022.
“In our view, the cyclical bull market for U.S. equities from the 2020 COVID-19 low shows signs of its age. This makes for a vulnerable 2022. Late 2020 saw a plethora of bullish breakouts across indices and indicators to confirm a healthy cyclical bull market and the potential for the rally from March 2020 to continue. Late 2021, however, stands in stark contrast to where the technicals stood a year ago. As we move toward 2022, many indicators across breadth, volume, credit and financial conditions have mature signals, bearish divergences or failed breakouts,” Suttmeier warns.