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The Santa Claus Rally

By Craig Cobb

There are many market myths out there. Some are useful to keep in mind, while others are plain ridiculous. There is nothing certain in the markets - but there are  certainties in human behaviour. And one of them is that there are people who are convinced they are experts on subjects they actually know very little about.  I don’t know why, but investing in stocks is an area where such people come out in force.

I am a trader and investor with over a decade in the markets. And in my experience, “just buy the Santa Claus rally” is likely to come up every November in any trading or investing conversation.  But is the Christmas rally a viable trading strategy, or is it a market myth? Will these theorists be proved right this year, or will Santa Claus turn out to be big brutal brown bear?

Let’s have a look at the charts, focus on some of the major global indices, and see what we are dealing with at the end of October.

Let’s start with the US 500. It is clear there have been a number of lower highs since the annual high back in August. With the lower highs coming into play, it has to be said that at this moment, the US 500 does not look on the strong side.Next we consider the UK100, which is now in a definite downtrend. We had a lower high and are now seeing a lower low. Sure, it had been trending up very well until this trend reversal, and it may well bounce back into an uptrend. But for now, it is in a downtrend and bearish on the daily movements. Now, let’s have a look at the Australia 200. In my view, this has a double negative. The bigger picture indicates a lower high, but not yet a lower low. Meanwhile, the last few weeks have added a lower low to go with its lower high, which means it is in a daily downtrend.Finally, we have the Japan 225 and that is a breath of fresh air with a strong daily trend, along with the moving averages fanning well and convergence on the indicators. Santa looks as if he may be bearing gifts in Japan.

So based on the view around these four indices, what looks most likely? As noted, the US, UK, and Australian markets look very bearish indeed. Does this mean that the Japan 225 is the leading index of these four and that the other markets will turn and catch up? Or does it mean that the Japan 225 is lagging the other three markets and may soon join the bearish trend? Could it be that the Japan 225 has been performing well in its own sphere because it hasn’t been pushing new annual highs like some of the other markets, and is now brushing off the negative sentiment and having its run now?  One possibility is that if the Japanese market takes any bad news to heart, it may then fall hard and catch up on the slide in other major markets.

All of these scenarios are a possibility. In my view, the US, UK and Australian markets show no signs of strength at the moment and I will not be buying blindly in the hope of a rally into the holidays. Anyone who thinks Santa Claus is coming may soon be wishing they hadn’t hung up their stocking

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