Tuesday 3 November 2015

Will the S&P 500 produce a Christmas rally?

Markets have been lethargic of late as traders begin to assess the strength of the present rally that was spurred on by possibilities of monetary stimulus by various central bankers however at the same time being fed (excuse the pun) with hawkish statements from the Federal Reserve.

The initial reaction after the announcement last week was negative with a comeback rally from the bulls that helped the index finish strongly up by over 1%. But since then we've seen the market digesting the news with not much movement in a either direction leading to frustration on both sides.

 With less than 60 days left in the year everyone's focus starts to shift towards the much anticipated Christmas rally to try cheer up the dismal stock performance seen so far this year.

An interesting development that is unfolding at present is the new highs made by the Advance/Decline line on the S&P 500. But what is the Advance/Decline Line?

It is the net advance of the gainers and faders on the S&P 500 accumulated everyday. So a correct analysis would say that making new highs means there are more stocks advancing than declining indicating underlying strength in the market.
If one looks closely at the S&P 500 you'll notice that there is divergence here where the index is making lower lows and the Advance/Decline line is going higher. This indicates a degree of weakness to come in the short term.

Although we cannot say for sure what will emerge over the long term but I think it's safe to assume that after such a mammoth rally it's good to see a pullback or consolidation take place. Whether buyers have the ability to take their cue from there is to be seen, but if they do I'm certain we'll see a Christmas rally materialize.
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