"People do not like to think. If one thinks, one must reach conclusions. Conclusions are not always pleasant."
Trading for the year is quickly coming to an end. With only three full days of action left the big question is whether some last-minute games will trip up traders who are anticipating that a Santa Claus rally will continue without interruption.
If we look back at the action the last two years we see that the market stumbled in the last two trading days before the calendar flipped over. This sort of action is caused by any number of things, such as tax issues, portfolio positioning and a desire to start the New Year with a clean slate.
One issue that may arise in the waning days of 2016 is asset allocation by pension funds. The S&P 500 is up sharply since the election and if funds want to maintain the same level of allocations to bonds and equities they will need to sell nearly $40 billion of stock. There is no guarantee that funds will keep the allocation between bonds and stocks the same, but there is going to be some pressures in this regard as things wind down.
While allocations and tax issues will be major factors in the next couple days, the good news is that traders are enjoying some old-fashioned holiday trading. We had some great examples of big movement in small-cap names yesterday. Names such as Northern Dynasty Minerals (NAK) , Conatus Pharmaceuticals (CNAT) and Cemtrex (CETX) offered great opportunities for aggressive traders. NVIDIA (NVDA) showed how end-of-the-year window dressing can benefit big-caps as well.
The Dow Jones Industrial Average still is struggling to generate enough momentum to take out the 20,000 level. I was a bit surprised it didn't accomplish the deed yesterday, but after an early push the momentum rotated into the small-cap speculative names. Strength in oil helped to keep things in the green, but softness in biotechnology helped to produce a close at the lows of the day. Despite the softness in the DJIA, breadth was very strong as small-cap names outperformed.
The early action this morning does not appear strong enough to push the DJIA to the 20,000 level. There is little news flow and volume is very slow, but all it will take is one decent buy program to accomplish the deed. I suspect that the 20,000 level will not hold for long, but at least the annoying news coverage will slow.
My game plan is to be ready for some allocations into the end of the year to cause volatility.I'm focused on the small-cap trades that are working and likely will have an extremely high level of cash when we close trading for the year. If I can knock out a few more gains during the Santa Claus rally, I'll be happy to start 2017 with a clean slate and a fresh perspective.
It is holiday trading right now, but that doesn't mean that we won't see some downside action in the next couple days.