Be happy with today’s selloff

Over the last few years, it is almost a clockwise occurrence that the market will go higher over the Christmas time, so nicknamed the Santa Claus rally. Now we are moving into Nov and it is the time again to consider a SC rally. The question is: is it as sure as it was in the past years? Certainly it is too early to be sure with anything but my thinking would be it depends on how the market will behavior in the coming days or weeks prior to Christmas.

 

The market usually sets itself up for a SC rally, in a way to gain enough technical strength and energy by experiencing some selling first to cause enough panic with oversold conditions. Then a SC rally ensues. It is almost always set up that way. This year, I was not so sure before today. You see, for months the market has again and again reached its new highs and we are hardly seeing even a 1% decline, not mentioning 5-10% decline that is quite normal in any bull market. If this continues towards the Christmas with the market steady going up or sideway moving without much downside, I can hardly see any major rally to be seen during the Christmas. We may even see a SC selloff instead!

 

Having said that, the past few days a divergence between the market new highs vs increasing VIX was sending us a hint that some sort of one or two day panic selling was on the way. We have seen this kind of divergence back in April and August when VIX started to move up from its extremely low (<10) while the market was happily moving up every day. Then all the sudden out of blue, VIX shot up 50-60% with a couple of days and the marketed tanked by 2-3% plunge. Today’s selloff that hopefully can last another day or two will actually nicely set up a stage for the market to go into the SC rally by the year end. I hope we can see more downside with elevated panic from this selloff! Be happy if you are waiting for a Santa Claus rally.