Hey 5-Star Trader,
Historically speaking, the market tends to rally near the end of December going into the following year. This happens so regularly that Wall Street coined the term “Santa Rally” which refers to the last five days in December as well as the first two days in January.
However, this year market performance has been different in many ways and it has people wondering… will we see a Santa Rally this year?
To the untrained eye, November action might not be concerning. The market was trending upward and even hit a new all-time high. But upon further analysis, there are factors that should be raising red flags going into December. The main issue I have is the fact that we were not in a broad-based rally last month.
A broad-based rally is a benchmark that traders use to test the performance of the market. When we are in the middle of this type of rally, the majority of all stocks are rallying higher. This was not the case in November. Instead, as the market was creeping higher, a large portion of stocks were tanking.
Names like Peloton (PTON), Zoom (ZM), and Docusign (DOCU), are major stocks that many people bought during the pandemic, but they were down by 50% or more at certain points last month. This meant the entire market was being held up by only a few major, large-cap stocks. Microsoft (MSFT), Apple (AAPL), Google (GOOGL), Netflix (NFLX), Facebook (FB), and Tesla (TSLA) make up such a large portion of the indexes that if they are strong, and 80% of stocks are weak, the indexes hold up.
But now can you see why this is such a problem?
Now we are left in a situation where we only have a handful of stocks performing at their best. If one of these big-wig companies takes a turn for the worse, it could be a catalysis for a huge gap down.
Furthermore, we did see a major sell off on the Friday after Thanksgiving — and more this week. The market has been trying to recover, but I can’t help but wonder how the next few weeks will play out. For now, I remain optimistically hopeful, and overly cautious, as we work through the final month of 2021.