Coal in the Stocking

The Santa Claus rally, which is supposed to start on Christmas Eve and last until the 2nd trading day of January did not deliver on the hype.  The SPX ended up down during that period, only 0.5%, although it felt worse than it actually was.  The dips are sharp and scary when they happen, but shallow.  The 3 day post election rally from November 6 to 8 covered a range of SPX 5865 to 6012.  The market has traded mostly in that small range for the past 2 months.  Yet the VIX has gone from 14.94 on November 8, to 16.13 on January 3.  The market is hurriedly moving up and down in a range, but ultimately going nowhere.  

The speculation in volatile, momentum stocks remains hot.  There has not been a noticeable flush out of weak hands, even with that VIX spike above 28 after the December FOMC meeting.  Its been a listless back and forth movement that doesn't signify much.  While a lot of investors were caught off guard when there was no year end rally, it just shows you that the fast money was offsides, but it hasn't permeated to the larger, slower money.  

With the COT data delayed by 1 business day, you don't have futures positioning data that covers the post Christmas selloff.  The pre Christmas data that covered the big drop and recovery post FOMC showed asset managers with nearly the same net long position, although open interested dropped huge after the quarterly triple witching expiration.  It was mostly dealers covering shorts and hedge funds adding to shorts.  

It appears that the post Christmas selloff was traders and fast money investors front running the potential delayed capital gains tax related selling in January.  When too many investors look at the calendar to make their selling decisions, you have price insensitive flows that roll over bids with reckless abandon.  That's what you saw happen from December 27 to January 2.  With Friday's all day rally, it looks like the most eager, price insensitive sellers are mostly done.  

You happened to see a lot of the selling on the first trading day of 2025 concentrated in the biggest winners of 2024 like AAPL and TSLA.   It shows that there were a lot of investors just waiting for the calendar year to change to take profits in their big winners, in order to delay capital gains taxes.  Of course, they could do that by selling in February or March, but apparently the Fed's "hawkish" cut made them nervous and eager to sell as soon as possible in 2025.  

The selling in the big winners in early January is not a sign of a weak 2025.  What is a sign of a potential weak 2025 are the high equity allocations, excessive Trump fueled optimism about the US economy, and sky high valuations.  Add to that the bond market weakness, and you have a potentially explosive situation to the downside sometime this year.  

The vibes coming out of CNBC and Twitter is still a lot of complacency, but less bullish enthusiasm and much fewer calls for a melt up.  It is likely that we've reached the sentiment top for this bull market in early December.  That doesn't necessarily mean that we've reached a price top yet, but it does mean that upside is limited from current levels.  I would be surprised if the SPX went above 6400 this year.  In general, you need investors to get more bullish for prices to keep rising in perpetuity.  When investors are getting less bullish, prices can go up in the short and medium term, but not for the long term.  

The put/call ratios continue to show a lack of put buying and lots of call buying in individual names.  But the excessive call buying is gone. This supports the view that we're probably going to be stuck in this range.  

Missed the graceful exit during that brief Christmas rally, as I was expecting the market to give bulls more time to sell at the highs.  But alas, too many were trying to play for that Santa Claus rally and the exit was too narrow for everyone to get out at high prices.  I believe there will be a chance to exit more gracefully this week after most of the eager capital gains related profit takers have sold already.   Looking for a potential move back up to SPX 6050.  This time, I will be more quick to sell, as I do not want to be stuck holding the bag again on the next swift move lower, which likely will happen again this month.