Well, Christmas has come and gone, and I hope it was joyous for everyone. However, for investors, it was yet another year where the so-called Santa Claus rally never materialized. More importantly for investors, major indices continue to fail at pivotal moments. It’s the subtle stuff, but after an extended period, the inability to breakout leads to a big pullback.
The Dow has quietly made a series of lower highs and lows, which could morph into something more worrisome.
While equities search for stock-specific news and developments in order to give it a spark, there’s also a hurdle that can only be cleared with macro evidence. The domestic and global economies are gaining upward momentum.
The best evidence is a bounce in commodities, especially in crude oil. There are other factors for bounces such as the levels of inventory and direction of the U.S. dollar. In fact, commodities are at such low levels; even ten-percent moves prove nothing with respect to a narrative beyond trading.
For this reason, the big bounce in crude last week was only a big bounce in a commodity that was north of $100 in 2014. This year has seen major rebounds in crude that fizzled, resulting in sharper declines (See March and September). Crude could rally to $45 and not break the downtrend.
Volume will be lighter than usual all week long, and the absence of tier one news of earnings reports means that the market will be left to its own devices. This is actually a good time to check the gut of investors. Are they willing to buy without clear impetus?
The answer is yes; however, trends must be broken and reversed.