There is no way to sugarcoat the market's poor performance. While December started with a bang, it ended with a whimper, with a long stretch of daily losses into year-end. Now, 2025 is opening with a whimper. Small caps fell apart after attempting to "make a comeback," and overall market breadth declined. However, with the markets now oversold, we should expect a rally heading into the Presidential inauguration, which likely started on Friday.
On Christmas Eve, Santa arrived, pushing the markets back above the important 50-DMA. However, the market sold off on Friday to successfully retest the 50-DMA. While it may seem that the "Santa Rally" stalled, I suspect that we could see some buying next week as portfolio window dressing concludes and traders position portfolios in the first two days of January.
The ongoing market churn continued as expected this past week but became violent on Wednesday following the Federal Reserve meeting. While the Fed cut rates as expected, the market shock came from the lift in its outlook for interest rates in 2025 by a half percentage point. The market is assuming that the Fed is giving up on the idea that inflation will return to the 2% target next year,
Last week, we discussed that the risk to the markets was the annual portfolio rebalancing process. That certainly seemed the case this past week, with the market trading being fairly sloppy. Attempts to push the market higher were repeatedly met with sellers, and we saw a rotation from over-owned to under-owned assets. Notably, that selling pressure arrived as expected, and while such could persist until early next week, we should be getting close to the end of the distribution and rebalancing process. The good news is that the recent consolidation paves the way for "Santa Claus to visit Broad and Wall."
Last week, we discussed how speculation and leverage have returned in earnest to the market as investors rush to take on increasing levels of risk. With markets rising steadily all year, it is unsurprising to witness investors lulled into an elevated sense of complacency. Stocks, bitcoin, leveraged investments, and meme stocks are all surging higher, which is certainly reminiscent of the "madness" we witnessed following the Covid lockdowns. I posted the following chart on "X" Friday morning for reference.
For the week, while there was a bit of sloppy trading along the way, the market finished at new highs, eclipsing the 6000 level on Friday. Technically, the market remains in a very bullish setup, holding support at the 20-DMA and then breaking out to new highs. That rally reversed the short-term "sell signal," which gives the market room to trade higher into the first week of December. The rising trend line from the August lows remains the likely peak to any rally in December, and as noted last week, expect some weakness in the second and third week of December as mutual funds make annual distributions. For now, any corrective action in early December should be bought in anticipation for a rally into year end.
Last week, we discussed the impact of the Trump Presidency on the financial markets based on expectations of tax cuts, tariffs, and deregulation. Since then, the "Trump Trade" went into full swing, pushing the markets higher; however, as we noted, that the trading had gotten a bit ahead of itself, and we saw some consolidation and profit-taking that reverted the market to the 20-DMA. Such is unsurprising given the overbought conditions with a more extreme deviation from the 50-DMA. However, the market recovered somewhat this past week, with buyers entering and reversing early morning market declines.
While there are some short-term technical concerns, as discussed in "Seasonality: Buy Signals And Outcomes," there are three primary reasons to remain optimistic into year-end:
With the election over and the Federal Reserve cutting the overnight lending rate by another 25bps, many of the headwinds the market was hedging for are now behind us. As a result, the market surged higher, hitting our year-end target of 6000 on Friday. Furthermore, since election day, the "RE-risking" rally reversed the short-term sell signal, supporting higher prices. As we stated over the last few weeks, despite the many media-driven narratives, the underpinnings of the market remained bullish, suggesting the recent pullback to the 50-DMA was a buying opportunity.