Trump-Santa Claus Rally running out of Christmas cheer?

Wednesday’s low-volume downer of a trading day may help assure that confidently predicted record Dow close above the magic 20,000 handle doesn’t happen.

Absinthe, anyone? Revelers and wobbly Santas at Cabildo Alley in New Orleans' French Quarter. (Image via Wikimedia, CC 2.0)

WASHINGTON, December 28, 2016 – The Maven returns to the lists briefly today after taking another day off on Tuesday, due largely to largely to the market’s expected anemic post-Christmas laziness and lack of direction. Wednesday’s trading action continues the current pattern of low-volume meandering, although all markets have taken a decidedly negative tone almost from this morning’s opening bell.

As we write this article at 1 p.m. ET, all three major averages are off by a rough aggregate of approximately 0.50 percent. Not bad, really, but it somehow feels a little ominous. Perhaps that’s because the Maven has seen swell rallies like this year’s Trump-Santa Claus Rally eventually peter out rather quickly and all-of-a-sudden.

While we’ve enjoyed this year’s rocket-propelled version of the year-end rally, the last week or so has looked a bit like irrational exuberance to us, so perhaps it’s time to curtail the festivities for at least a while. Plus, let’s keep this in mind: All the cable news anchors, blow-dries and “experts” have been pumping for the Dow Jones Industrials to close above a record-breaking 20,000 so they can publish the hyped up stories they’ve already written about yet another “first” event. Wouldn’t it be just the thing for Mr. Market—always a perverse kind of guy—to frustrate them on the last 3 trading days of 2016?

If you look at the relevant charts—and there are several—you quickly note a pattern here. The rally looks like it actually wants to continue. But for such a bull move to continue, stocks and the averages tend to require at least an interim breakdown to clear out the froth before the rally resumes anew.

Read also: Our Prudent Preliminary 2017 ‘Dogs of the Dow’

The other corrective scenario is for markets to back and fill for an indefinite period of time. While both “solutions” to a highly energetic and arguably overbought market like this one are usually positive in the end, the sideways back-and-fill pattern requires the least ingestion of Tums or Maalox by the average home-investor like yours truly. However, this sideways activity, sometimes called “digestion,” or “digesting the move” is boring, a bit tough to sit through and, unfortunately, indefinite and difficult to time.

It looks like we’re at one of these junctures right now, with a diminished number of traders and the usual, puckish and probably bearish hedge funds and HFTs all either selling or shorting into little opposition. It’s a frustrating way to bring 2016 to a close, but that’s likely what we’ll be seeing today through COB Friday as thoughts turn to this weekend’s end-of-the-year revels.

We’re actually afraid that when trading resumes, we’ll get a short but upsetting pre-Inauguration Day replay of the bloodbath that took place just this year back in January and February, a gigantic trashing of nearly all stocks that pretty much ruined the 2016 returns in nearly everyone’s portfolios, including many famous investment gurus, hedge funds and yes, yours truly.

While the rest of 2016 was robustly positive in general, particularly post-November 8, it took a lot to offset that January-February pancaking. Even then, for most investors, this will likely lead to a break-even portfolio on December 30, the last trading day of this waning year.

That said, we don’t expect any January drubbing to be as severe as the one we experienced in the first two months of 2016. But, on the other hand, we’ll probably put on one or two short ETFs this afternoon and sell off a couple of profitable positions this afternoon or tomorrow, just because. We can use the profits. And besides, if we still like the stocks we’re selling, we can always buy them back some time next year if they really do go on sale. (More details in our companion column.)

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