Could a Delayed Santa Rally Propel the Market Before the New Year?

Santa still stuck
The SPX remains within the range that has been in place since September. So far, there hasn’t been a true “Santa rally,” but neither is there significant bearish pressure. We’re not getting excited until the market decides to break either up or down.

Late arrival of Santa
Will Santa manage to save investors this year?

Late Santa is normal
“It’s not just about this year; the first half of December is usually relatively weak. Looking at the past 55 years, the average performance of the SPX is almost flat. The traditional ‘Santa rally,’ which makes December’s performance so impressive, usually comes in the second half of the month. Maybe people need to go on vacation or stop selling for tax-loss purposes, but whatever the reason, solid gains typically appear around the holidays.”

Never a third consecutive down Santa
“The official Santa rally starts on December 24 and covers the last 5 trading days of December plus the first 2 days of January. The SPX has risen 77% of the time. The last two rallies were negative, but there has never been a third consecutive decline.”

Statistics
Average gain: 1.3%
Winning frequency: 77%

Investors have room to buy

Hedge Funds
Some key investor groups still have significant potential to participate in a possible Santa Rally.
The net leverage of hedge funds is far from extreme, judging by the percentiles.

Retail Investors
Demand for stocks from retail investors slowed slightly last week compared to the very strong start of the month. There is still room for growth and for increasing positions this week.

Professionals
Financial spreads narrowed significantly over the past week.
“We have long used financial spreads as an indicator of the supply and demand for leveraged equity exposures among investors trading futures, swaps, and options. When spreads widen, it usually signals increased demand for leveraged positions. When spreads tighten, it indicates that demand is decreasing. We will be closely monitoring the spreads over the next two weeks.”

Positions are broadly balanced
“Our favorite indicator for investor positioning is the put-call skew on individual stocks. It combines 500 volatility surfaces and reflects accumulation across a wide range of market participants. Currently, this indicator shows balanced positions.”