Earlier this week I noted that I thought sentiment was still centered around the "Santa Claus" rally scenario. It was like a two part scenario: We'd rally into year-end and then once earnings come out in January, we'd head back down. That was pretty much consensus. And we know what the market thinks of consensus views.
Then came the Federal Open Market Committee meeting and folks got shaken out of that view. By the end of Thursday, I did not hear one person calling for a year-end rally. Even the bulls seem to think it will be difficult, because "the clock is running out."
I don't know why we go through this every year, but the Santa Claus rally -- technically speaking -- is the last five-trading days of the year and the first two of the new year. That's it. I get that information from the Stock Trader's Almanac. I did not pull it out of thin air. Yet every year by Thanksgiving there is talk of the Santa Claus rally as if it will be with us for an entire month or more. That only serves to disappoint folks.
Can we get such a rally? Sure.
We are going to be short-term oversold early next week. And quite frankly that might not line up perfectly with the technical definition time-wise of a Santa rally, but it can come close in terms of timing.
The Oscillator is based on the 10-day moving average of net breadth and you might recall that this Monday will mark two weeks since the market turned south. That means that starting Monday we will start dropping those negative breadth readings off the Oscillator.
This is a far different picture than the intermediate-term oscillator, which you will recall also got overbought right around Thanksgiving. But take a look and you can see this oscillator, which is based on the 30-day moving average of net breadth is still far above the zero-line. It isn't even close to an oversold condition.
And while we know that in the very near term sentiment has become gloomy as can be, I would go back to my view that the Investors Intelligence bulls are still too high. Couple that with the National Association of Active Investment Managers Exposure and here we find they notched up to 71 this week, the highest since the August peak. I suspect before we get to another intermediate-term low in the market this will cycle back to a much lower exposure.
You already know I am not a fan of industrials, transports and semis, but now I am going to add utilities to that list. This line looks to me as if it wants to break.
The bottom line is that I think, especially if we are down on Friday, we can set up for another short-term oversold rally next week. But since we just got overbought on an intermediate-term basis two weeks ago, it's just a short-term rally.
