It was almost perfect timing that last Friday I posted my view to call for a year end rally to continue. That was the time when S&P was crashing hard in a few days to 2005 and most of people were pessimistic and some were even looking for an Aug-like 1000 points drop in the following Monday. As a contrarian trader, I figured that was likely a short-term bottom. With high VIX and oversold junk bonds, I argued that we could see a quick year end rally from there with declining VIX and even recovering HYG for high-yield bonds. Apparently we nailed it, as in the past 3 trading days, S&P jumped to 2065 with crashing VIX and also advancing HYG. What a difference could the short 3 trading days make!! Now it seems everyone is bullish and S&P has reached the pivotal 50 DMA with a 3% increase within days, which is quite overbought at the moment. VIX is back down to the 15 level. The question is whether this Santa Claus rally could continue. Well, anything is possible but I'm afraid the upside from here is quite limited, if any. The Santa Claus rally may have done its course and is likely ending. Tomorrow we may see another gap high day but that will probably the exhaustion of the final up move. If the market has a higher opening but lower closing tomorrow, it will be a clear signal that the rally is ended and next week will likely be a very choppy short trading week to close the year end of 2015.
In the past few months, S&P has largely been driven higher by very few high-tech stocks, most notably FANG stocks. But in the past couple of weeks, these FANG have very much lagging behind and have not really participated in the latest rally. This is another warning sign that S&P may face a very tough 2016. S&P may visit the 1800 level at some point in 2016 if it continues with its downtrend started in Aug. This may be consistent with the signal the junk bonds are sending. We will see as we move into 2016 soon.
Since I will be traveling in most of the final days in 2015, this will likely be my last blog for 2015. I sincerely wish all my friends a very
Merry Christmas and Happy New Year!
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