Overly Bullish Speculators Front-Run “Santa Claus”

By Lance Roberts | December 19, 2020

In this issue of “Overly Bullish Speculators Front-Run ‘Santa Claus'”

  • Here Comes “Santa Claus” 
  • Good Intentions
  • Portfolio Positioning Update
  • MacroView: The Energy Rally Is Likely Premature
  • Sector & Market Analysis
  • 401k Plan Manager

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Catch Up On What You Missed Last Week

Here Comes “Santa Claus”

Last week, we discussed the market approaching the 3750 year-end price target we had established back in August. To wit:

“That target was derived when I previously set out several ‘risk/reward ranges.’

‘With the markets closing just at all-time highs, we can only guess where the next market peak will be. Therefore, to gauge risk and reward ranges, we have set targets at 3500, 3750, and 4000.’

I have updated the chart below. The “black arrow” was where I initially did the analysis.”

With the markets currently “knocking on the door,” we will likely reach that target by year-end. Such is particularly the case with the seasonal “Santa Claus” rally just ahead of us. As we discussed in “Will ‘Santa Claus’ Visit Broad & Wall:” 

“Stock Trader’s Almanac explored why end-of-year trading has a directional tendency. The Santa Claus indicator is pretty simple. It looks at market performance over a seven day trading period – the last five trading days of the current trading year and the first two trading days of the New Year. The stats are compelling.

‘The stock market has risen 1.3% on average during the 7 trading days in question since both 1950 and 1969. Over the 7 trading days in question, stock prices have historically risen 76% of the time, which is far more than the average performance over a 7-day period.'”

Santa Claus Broad Wall, Technically Speaking: Will “Santa Claus” Visit “Broad & Wall”

Chasing The Sleigh

Given the high probability of higher prices by year-end as managers “window dress” portfolios for annual performance reports, we increased equity risk this past Tuesday. We reported the trade to our RIAPRO Subscribers (Free 30-day Trial) at the time of execution.

“Adding 5% of SPY to Equity and ETF portfolios for the end-of-year strength. As noted in both posts below, there is a 76% win ratio for the S&P between the 15th of December and the first week of January.

  • Initiate a 5% position of SPY in portfolios”

As discussed last week, while there is a 76% chance the markets will be positive, there is a pesky 24% chance it won’t. 

That Pesky 24%

As discussed in Thursday’s “3-minutes” video, the longer-term market dynamics are supportive of a rally into January,


So, why are we concerned? We wouldn’t be if the markets had not already rallied to more extreme extensions. (The weekly chart of the S&P 1500 index is pushing more extreme overbought conditions now, but can certainly get more extreme.)

Furthermore, this monthly chart of the S&P 500 index shows more clearly just how stretched markets are getting. 

While none of this says the market will correct tomorrow, next week, or even next month, it does suggest investors have harvested the “low hanging” fruit. 

So, while we have the “good intentions” to “ride Santa’s Sleigh” into the new year, we want to make sure you are aware the “Grinch could still steal Christmas.” 

Santa Claus Broad Wall, Technically Speaking: Will “Santa Claus” Visit “Broad & Wall”

Good Intentions

An old proverb states, “The road to hell is paved with good intentions.” 

US economics professor Danny Yagan, in “Riding the bubble? Chasing returns into illiquid assets,” discussed that retail investors might say one thing, but often do quite the opposite. 

I hear this almost daily when talking with prospective clients. During initial discussions, they tell me how “conservative” they are in their portfolios. However, while they say they are conservative investors, their actual portfolio allocations and selected investments are usually anything but conservative. 

An excellent example of this dichotomy is the Yale Stock Market and Valuation Confidence Indexes. If you examine the data, you find that while investors are crazy bullish on the market over the next year, they aren’t attracted to its valuation. As shown in the chart below, a historically low share of investors thinks the market is cheap. Valuation Confidence, from both individual and institutional investors, is at the lowest levels on record. (Index is inverted)

Irrational Exuberance?

The chart below shows the combined average of institutional and individual investor valuation confidence subtracted from future returns confidence. When the reading is positive, the confidence the market will be higher one year from now is more elevated than the confidence in the market’s valuation.  The opposite is the case when the reading is in negative territory.

The key takeaway is that investors think simultaneously, the market is over-valued but likely to keep climbing. 

Such is the same phenomenon famously described by former Fed Chair Alan Greenspan in a December 1996 speech on “Irrational Exuberance.” 

The explanation for this lies in the behavioral finance sin of “anchoring.”

As we wrote previously in “The Money Game,” there are nine psychological “traps,” investors fall into that ultimately derail their “good intentions.” “Anchoring” is where investors remain focused on what happened previously and do not adapt to a changing market.

As noted in the chart above, outcomes have often not been good.

Stuffing Stockings

As noted in the chart above, it isn’t just “retail” investors getting overly exuberant about the market, but “institutional investors” are jumping in the pool with them. As I noted last week, portfolio managers are not only entirely long but have leveraged up portfolios to over 100% exposure to equities. 

While investment managers are “all in,” Wall Street strategists are rushing to ramp up price targets on stocks to lure more retail investors into the market. The “Fear Of Missing Out” is a powerful force few retail investors can resist.

As noted by SentimenTrader:

“Analysts on Wall Street have been busy upgrading the price targets on their stocks, too. Strategists tend to work from the top down; analysts from the bottom up. From both directions, Wall Street is extremely optimistic.”

Might want to take a mental note of where peaks in the strategist’s price target upgrades align with the market.

Portfolio Positioning Update

The point here is simplistic. 

While the market is entering into a seasonally strong time of year, the market is already very overbought based on past historical statistics. Such provides a risk level that would not exist had the markets not already had a decisive run from the October lows. 

Does this mean you should “sell everything” and move to cash? Absolutely not. 

As I stated at the outset, we have increased our portfolio allocations to equities and decreased our hedges to participate in the market. However, we are not turning a “blind eye” to the “risk” either. 

Currently, there are a vast number of investors that are falling prey to the Dunning-Kruger effect. Such was a point Doug Kass made on Thursday:

“The Dunning-Kruger effect is a cognitive bias in which people with low ability at a task overestimate their ability. It is related to the cognitive bias of illusory superiority and comes from people’s inability to recognize their lack of ability. The Dunning-Kruger effect observes that people who are the most ignorant about something will be the least aware of their own ignorance; they have the highest sense of false confidence.”

As noted, investors are overly confident. 

What we do know is that “momentum” is a “tailwind” for investors currently. The hope for a “vaccine” allowing the economy to return to normal with another stimulus package is reason to be optimistic.

The actual outcomes will fall far short of overly optimistic projections, and the disappointment will lead to the eventual correction. But we will discuss that later.

For now, we will continue to trade momentum until our money-flow indicators turn negative again. 

Besides, we have been “really good” this year, so we are hope “Santa Claus” doesn’t bring us a lump of coal. 

The MacroView


If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO

Market & Sector Analysis

Analysis & Stock Screens Exclusively For RIAPro Members

S&P 500 Tear Sheet


Performance Analysis

Technical Composite

The technical overbought/sold gauge comprises several price indicators (RSI, Williams %R, etc.), measured using “weekly” closing price data.  Readings above “80” are considered overbought, and below “20” is oversold. 

Portfolio Positioning “Fear / Greed” Gauge

The “Fear/Greed” gauge is how individual and professional investors are “positioning” themselves in the market based on their equity exposure. From a contrarian position, the higher the allocation to equities, to more likely the market is closer to a correction than not. The gauge uses weekly closing data.

NOTE: This week, I published the 4-Week Average of the Fear/Greed Index. It is a rarity that it reaches levels above 90.  The current reading is 96.07 out of a possible 100.

Sector Model Analysis & Risk Ranges

How To Read.

  • The table compares each sector and market to the S&P 500 index on relative performance.
  • The “MA XVER” is determined by whether the short-term weekly moving average crosses positively or negatively with the long-term weekly moving average.
  • The risk range is a function of the month-end closing price and the “beta” of the sector or market.
  • The table shows the price deviation above and below the weekly moving averages.

Weekly Stock Screens

Currently, there are 3-different stock screens for you to review. The first is S&P 500 based companies with a “Growth” focus, the second is a “Value” screen on the entire universe of stocks, and the last are stocks that are “Technically” strong and breaking above their respective 50-dma.

We have provided the yield of each security and a Piotroski Score ranking to help you find fundamentally strong companies on each screen. (For more on the Piotroski Score – read this report.)

S&P 500 Growth Screen


Low P/B, High-Value Score, High Dividend Screen

Aggressive Growth Strategy

Portfolio / Client Update

There are many reasons to be concerned about the markets currently. Exuberance is extremely elevated, and investors are “all-in,” which is historically a reason to be cautious.

However, with very low liquidity in markets and the year-end rapidly approaching, there is a decent probability the market will rise as portfolio managers window-dress from year-end reporting. 

Currently, hopes are high for a strongly rebounding economy in 2021 as the “vaccine” takes hold. The reality is that much of the “pent up” demand for goods and services was pulled forward by excess stimulus payments. Another round of “stimulus” will pull forward even more of that demand. 

Such increases the risk of both earnings and economic disappointment next year, which could undermine the bullish thesis. While it may not seem to matter currently, “valuations” are incredibly elevated. There is little “value” in the market, and with markets already “priced for perfection,” there isn’t much room for failure. 

Our goal remains to navigate these markets as best we can, but focusing on conserving your principal. While 2020 was a challenging year performance-wise, we expect to perform much better in the upcoming environment where we expect “fundamentals” to matter again. 

Portfolio Changes

During the past week, we made minor changes to portfolios. We post all trades in real-time at RIAPRO.NET.

In anticipation of the seasonally strong period from Christmas to the first two days of January, we added some additional exposure to portfolios. 

“Adding 5% of SPY to Equity and ETF portfolios for the end-of-year strength. As noted in both posts below, there is a 76% win ratio for the S&P between the 15th of December and the first week of January.

  • Initiate a 5% position of SPY in portfolios.”

Furthermore, we made the following changes to individual models.

EQUITY Portfolio

  • Initiate a 2% position in UNP (Union Pacific) into the portfolio.
  • Add 1.5% to RTX (Ratheon Technologies) to bring the exposure up to 2%. (We had reduced previously to take profits)

ETF Portfolio

  • Add 1% to XLU to increase to 5% of the portfolio.
  • Add 1% to IYT to increase to 2% of the portfolio.

We are aware of the risks and are carrying tight stops on this position. 

As always, our short-term concern remains the protection of your portfolio. We have now shifted our focus from the election back to the economic recovery and where we go from here.

Lance Roberts



A Conservative Strategy For Long-Term Investors

If you need help after reading the alert, do not hesitate to contact me.

Model performance is a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. Such is strictly for informational and educational purposes only, and one should not rely on it for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

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Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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