Santa Claus Rally: Ya Gotta Believe

 | Dec 27, 2016 | 4:33 PM EST
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To paraphrase a famous editorial published in the New York Sun in 1897:

"Yes, Virginia, there is a Santa Claus rally. It exists as certainly as program trading and mark-ups and you know that they abound and give to your trading its highest challenges and greatest joy. Alas! How dreary would be the world if there were no Santa Clause rally. It would be as dreary as if there were no little traders. There would be no joy, no poetry, no breakouts to make tolerable this existence."

The action today was a classic example of a Santa Claus rally. The indices were not impressive at all but breadth was very strong as it approached nearly 2-to-1 positive. It was a day for action in small-caps. Around 450 names hit new 12-month highs and movers like Conatus Pharma (CNAT) , Cemtrex (CETX) , Northern Dynasty (NAK) , ENGlobal (ENG) and Nvidia (NVDA) delivered some nice gains to the speculative traders who focused on the micro rather than the macro.

To a great degree, the Santa Claus rally exists because we believe it exists, but that works just as well as anything else. The key now is to make sure we aren't caught by surprise if there is a swing in the last couple of days of trading. In the past two years, the indices sold off about 1.5% in the last two days of the year and set the stage for ugly action to start the New Year.

There isn't any reason to believe this pattern will repeat for a third year, but it is a reminder that anything can happen as we wind up the year. Much of what drives this action at this point is quite different from other times. Stay vigilant and be ready to move quickly. Santa Claus doesn't stick around for long.

Have a good evening. I'll see you tomorrow.

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