The rally leading up to and following the inauguration pushed markets back to all-time highs. While the month is not over yet, the return of bullish sentiment bodes well for the market to finish the month in positive territory. Furthermore, the current rally is being supported by positive earnings announcements, improvement in sentiment, and, most importantly, a return of share buybacks.
As of 11 a.m. CST Friday, the market broke above several resistance levels, including the 20 and 50-DMA and the downtrend resistance from the December highs. That technical bounce and break of the downtrend clears the way for a potential retest of those market highs. Furthermore, on the bullish side of the ledger, that technical bounce has reversed the MACD “sell signal” and improved overall relative strength, which should support a rally into next week.
Before we reach the full month of January, the market must pass the first five days. As of Wednesday, which concluded the first five trading days of January, that market did generate a positive return, rising about 0.62%. As we noted last week, this is the first of two "January Indicators" that have historically, on average, set the tone for the year. Since 1950, the S&P 500 has logged net gains during the first five days of the year 47 times. Of those 47 instances, the index ended the year up in 39 of them. That's an 83% success rate for the first five-day theory. However, don't get too excited. Of the 74 completed years since 1950, the S&P 500 has logged a full-year gain 73% of the time. That is likely because stocks are rising as the growth of the global economy continues despite the occasional stumble.
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.