The Most Bullish Seasonal Set Up In Years – Santa Claus To Call Broad & Wall

For the past few weeks I have discussed that seasonal studies suggested a stock market low by December 20th which coincided with the weekly, monthly and quarterly options expiration. That also happened to be the single largest expiration of all-time. As I also mentioned, while I have been in the mild to modest stock market pullback camp, I was caught off guard by the magnitude of Wednesday’s post-FOMC plunge. After Wednesday’s drop, I thought we needed one more new low to find a tradeable bottom.

Lots of folks have asked why the markets unraveled so quickly while Jay Powell conducted his press conference. In short, my view is that Friday’s options expiration was the culprit. Without getting too wonky the data suggested that once the stock market turned lower post 2:15pm the derivative dealers’ risk and exposure greatly increased as the snowball effect was in full force. In other words, downside momentum invited more and more selling.

Looking at the Volatility Index (VIX) below, you can see two large one day spikes, one on August 5th and the other last Wednesday. Although it doesn’t look like it, last week’s one-day spike was the second biggest spike in history on a percentage basis. That includes the Covid Crash, 2008 and Dotcom Bubble. The number one spike occurred in early February 2018 during Volmageddon. I bring this up because historic one-day spikes in the VIX often come at market lows.

Between the VIX spiking and seasonals suggesting a low, Santa Claus is supposed to call to Broad and Wall. The so called Santa Claus rally (SCR) begins at the close on December 23rd and ends at the close on January 3rd. The SCR averages more than 1.50% and works roughly 80% of the time. And let’s not forget what index usually leads this time of year, small caps. We will discuss the results in early 2025 as I typically do.

Let me be crystal clear. This is about as strong of a bullish set up into a new calendar year as I have seen in years. It’s on par with 2022, 2018, 2015 and, 2011. The stars are aligned, even if Monday sees a mild pullback after Friday’s emotional reversal. I plan to fully take advantage of the set up in the short-term. However, however, however, just because everything looks long and strong into January doesn’t mean it’s like shooting fish in a barrel. There remains risk.

No one should throw caution to the wind. I always need to know where my thesis will be wrong and in this case, it is a close below Friday’s low of 5830. The market is not supposed to close below that level, but it certainly can. The market is always right. It’s okay to be wrong. It’s not okay to stay wrong.

Finally, as I work on my Fearless Forecast 2025, I think it’s title is going to be 2025 – The Year Momentum Died.

On Friday we bought SPYM.