So far the Santa Claus rally has lived up to expectations, delivering a 2% gain so far in the brief window that encompasses the historical season. Keep in mind that the Santa Claus rally season began on Dec. 26 and ends on Jan. 3.
As I pointed out in the previous report, the Santa Claus rally phenomenon has resulted in a net market gain 75% of the time for an average gain of 1.5% since 1950. Whenever the market has failed to rally during this seasonal period it has tended to produce bear markets at some point in the subsequent year. This has led to the famous saying, “If Santa Claus should fail to call, bears will come to Broad and Wall.”
Although I see no reason to doubt that the Santa Claus rally will once again deliver a net gain for stocks, there is already a reason for concern as we head into 2014. The yield on the benchmark 10-year Treasury exceeded the psychological 3% level on Friday. Once Wall Street traders return to work after the holidays we could witness a reaction to this developing since stocks generally don’t like rising rates (i.e. falling bond prices)….
Once the initial upside impetus from the interim cycle dissipates in a few days the market will be potentially vulnerable to selling pressure. The bears have been waiting restlessly for their chance to pounce after being routed for the last 10 weeks. There are preliminary warning signs [deleted in fairness to subscribers]….
The 10-year Treasury Yield Index (TNX) has reached its highest level since July 2011. Sustained rallies in TNX normally end with equities coming under pressure sooner or later….[Excerpted from the Dec. 27, 2013 issue of Momentum Strategies Report]