‘Santa Rally’ is here: Should you ride the rally?

The bulls are taking charge. In the US, equity indices are leaping into uncharted territories. Is this the ‘melt up’ we have been waiting for?

Two weeks ago, I pointed out to readers that one should watch out for record highs in US stock market. The S&P 500, Nasdaq, and Dow were all crowding near their peaks despite a barrage of mediocre macro data. This ought to tell us something: When a market does not go down as it should be, beware of a rebound.

The last few sessions affirmed this. SPY, the widely-traded S&P 500 Index ETF,┬ábroke out to new highs without any hesitation. It appears to have made a ‘clean’ break above 300 (or 3,000 in the underlying index) and it now heading into 310.

The Nasdaq 100 Index ETF (QQQ) too advanced sharply into new highs. Prices closed at the psychological 200 level and are likely to trade around this level for the time being as the bulls digest this rally.

New record highs in the stock market always attract attention and, momentum capital. Simply because there is no resistance above. Most stocks are doing reasonably well (not Uber, mind you). The stock market sentiment is, slowly but surely, swinging from fear to neutral to greed.  Moreover, it is the US market that is surging ahead. Being the largest in the world, it is pulling other stock markets higher.

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In Europe, for example, DAX, FTSE MIB, and CAC are closing at their near-term highs. The latter broke out to new cyclical highs (see Featured Chart). As for the Italian MIB, the index is amidst a mini surge (see below). At this pace of gain, reaching 24,000 should not be too difficult. As for the UK FTSE 100, the twin worry of the General Election and Brexit makes it a potential laggard.

In Asia, the Chinese CSI 300 Index is also on the cusp of a major breakout. Prices have been hitting the overhead resistance at 4,000. A decisive break of this ceiling should open the door for a quick rise into 4,200, especially as the China-US tariff war may be near a truce (see below).

Overall, it is clear the risk sentiment is turning more bullish – despite the rolling bearish macro data. When prices are climbing a ‘wall of worry’ it signals that the underlying demand for stocks is strong. I expect the ‘Santa Rally‘ to last into the year end.

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