Did the Rally come to Early?

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So far, December has picked up where November left off, going up. While I continue to be bullish and believe "the trend is your friend," I want to emphasize that there will be some bumps in the road. It’s not going to be like November.

According to Jeff Hirsch's Stock Trader's Almanac, historical patterns can offer guidance, but traders should remain vigilant for shifts in momentum or unexpected news that could impact the market. Staying adaptable while following the broader trend will be key in navigating December’s trade environment.

Overbought Markets Pullback During Typical Early December Weakness

• Choppy First Half Before Year end Santa Claus Rally

• Small Caps Surge in Election Years

• “January Effect” Small Cap Out-performance Starting Mid-December

Trading in December is holiday-inspired and fueled by a buying bias throughout the month. However, the first part of the month tends to be weaker as tax-loss selling and year end portfolio restructuring begins. December’s first trading day leans bearish for S&P 500 and Russell 1000 over the last 21 years. A modest rally through the sixth or seventh trading day also has fizzled going into mid-month. It is around this point that holiday cheer tends to kick in (and tax-loss selling pressure fades) propelling the indexes higher with a pause near month-end. Election year Decembers follow a similar path, but with noticeably larger historical gains in second half of the month by Russell 2000.

Small caps tend to start to outperform larger caps near the middle of the month (early January Effect) and our “Free Lunch” strategy is served from the offerings of stocks making new 52-week lows on Quad-Witching Friday. An email Issue will be sent prior to the market’s open on December 23 containing “Free Lunch” stock selections. The “Santa Claus Rally” begins on the open on December 24 and lasts until the second trading day of 2025. Average S&P 500 gains over this seven trading-day period since 1969 are a respectable 1.3%.

This is our first indicator for the market in the New Year. Years when the Santa Claus Rally (SCR) has failed to materialize are often flat or down. Six of the last seven times our SCR (the last five trading days of the year and the first two trading days of the New Year) has not occurred were followed by three flat years (1994, 2004 and 2015) and two nasty bear markets (2000 and 2008) and a mild bear that ended in February 2016. Santa’s no show earlier this year was likely due to temporary inflation and interest rate concerns that quickly faded. As Yale Hirsch’s now famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”

I don’t think this means you are supposed to start bulking the trend but from the November low to yesterday’s high the ES has rallied 380 points and the NQ is up 1520 points. As I remember you don’t try and jump on the Santa Claus rally early.

As many of you know, the PitBull has a rule referred to as the "20s," which suggests that the first test of 6120 could act as resistance. Sometimes it works, and sometimes it doesn’t. The reason I post how many points the ES and NQ have rallied from the November lows is to illustrate the strength of the recent trend and the magnitude of the move over the last 22 trading days.

The strategy remains to look for buying opportunities during periods of ES weakness on Globex and buy the 30 to 50-point pullbacks, though recently we have only seen 15-25 points. There are still a tone of ES buy stops above but my gut says to be careful. I think Friday’s job report will be market-moving.