Setting Up for a Sell in January

There are a few things going for the SPX bulls that will last till the end of the year: 

1. Stock buybacks, which are large in December, averaging 10% of the annual buyback volume.  January averages 3%, the smallest amount for any month.  So we go from a big stock buyback spree in December to almost no buybacks in January. 

2.  Reluctance to sell stocks with big gains in the final 2 weeks of the year to delay capital gains taxes for 1 year.  This effect will be gone by January 2. 

3.  Portfolio window dressing for year end, after a big up year, most fund managers are reluctant to reduce their longs and want to show that they have a lot of long exposure at year end to their investors. 

4.  Seasonally, the last week of December is very bullish.  A significant part of that is psychological, as investors are in a better mood and less likely to sell. 

So why do I think it is setting up for a sell in January?  Because when you push things higher in December due to deferred selling due for tax reasons, stock buybacks, and seasonality, that gives you a bloated market that is higher than it should be. 

I have to admit that I didn't expect this kind of strength in the SPX in November and December.  I expected much smaller gains, but I underestimated how many weak hand investors were just waiting to buy once the US/China phase 1 trade deal was finalized.  Those fast money/weak hand investors are the ones that have been buying over the past week.  That sets up the SPX to a window of vulnerability in early 2020 when the above mentioned bullish factors disappear and the Democratic primaries get closer. 

The best time to put on an SPX short is probably December 30-31.  Waiting patiently and seeing a lot of opportunity on the short side next year.