The indices jumped to new all-time highs last week in anticipation of a Phase-One trade deal with China. The actual announcement of the deal in China on Friday produced little response as few details were known. Over the weekend, U.S. Trade Representative Lighthizer stated that the deal was "totally done" and would nearly double U.S. exports to China over the next two years.
The added clarity is producing some buying interest Monday morning and, more importantly, there are no signs of a "sell the news" reaction that many traders were looking for. Typically, when the market runs nearly straight up in anticipation of positive news, there is a tendency for some selling into the strength. The muted response on Friday probably helped to forestall that response and now the anticipatory bears are starting to worry that "fear of missing out" may be the more dominant theme as we roll into the end of the year.
This is the last full trading week of the year, with many market participants looking to close their books by the end of the week. There are a variety of end-of-the-year factors that will influence trading this week that undermine some of the typical technical patterns. There is tax planning, which will help to hold up the big winners as traders try to delay taking profits and then harvesting of losses for the laggards to offset gains. The indices have large gains this year, which makes for greater tax planning than usual.
In addition to tax planning, there will be positioning for the new year. Some managers look to lock in gains and start fresh in the new year while others look to start building positions in their top picks. This usually creates some volatility in the thin trading between Christmas and New Year.
With the China trade deal mostly behind us now, there should be more interest in individual stock picking and less focus on the indices. The market has been jerked around for so long on expectations about a trade deal that it has created some divergences in individual stocks that traders should find appealing. We have seen some of this already with very strong relative performance in biotechnology.
I'll be watching for signs of a "sell the news" reaction to develop, but as we have seen quite often on the Fed, the market has an inclination to treat good news as good news rather than an excuse to take gains. That can change, but right now it is looking like the anticipatory bears are going to find themselves being squeezed once again.
My game plan is to not make any big directional bets on the indices right now but focus on stock picking. In particular, I'm interested in some January effect plays. This is where poor performing stocks are sold for tax reasons and then rebound in January when the pressure relents.
This is a seasonally strong time of the year, but the potential for volatility is high and individual stocks can see some unusual movement. It can offer some good trading, but stock selection and discipline are more important than usual.