Santa Claus Rally or the Grinch Who Stole Christmas? (Part 1)

by LPL Research

50 years ago this Sunday was the premiere of How the Grinch Stole Christmas. Equities have had a big post-election rally, but what would it take for the Grinch to come and steal away the rally’s Christmas cheer? One big concern is the overwhelming excitement over the new highs. From a sentiment point of view, to see too much optimism can be a potential warning sign. Remember the amount of fear we saw ahead of the U.S. election (and during the 5% sell-off during the evening of the election)? That helped spark a huge rally, as many of the fears didn’t materialize. Currently, we are now seeing nearly as huge a shift in sentiment in how bullish many have become.

Here are a few examples of optimistic sentiment:

• The U.S. Investors’ Intelligence survey saw the number of bulls up to 59.6%, above the “danger zone” reading of 55% for four straight weeks. The last time it was above 60% was mid-2014.
• A well-known global fund manager survey showed cash levels had fallen by 1% over the past two months for only the third time ever.
• This same survey showed allocation to U.S. equities was at a two-year high.
• The CNN Fear & Greed Index was at 86 yesterday, which is in the extreme greed area and one of the highest levels since 2014.
• The National Association of Active Investment Management (NAAIM) Exposure Index came in above 100 for only the seventh time in the decade-long history of survey. This suggests that active managers are fully invested in equities.
• According to the National Federation of Independent Business, the U.S. Small Business Optimism Index in November had its largest surge since 2009.
• Demand for bullish derivatives, as measured by implied volatility, is at an all-time high.
• Bloomberg noted record bullish derivatives traded on the S&P 500 last Wednesday.

Importantly, increased optimism by itself isn’t a reason for weakness. Per Ryan Detrick, Senior Market Strategist, “We are seeing levels of excitement on equities like we haven’t seen for years in some cases. New highs will do that, but it is important to remember that this by itself doesn’t mean a certain coming market correction. It could be a potential warning sign, but seasonality and the improving economic data are the two biggest positives for equities in the near term.”

For more on what could bring the Grinch for equities, check back tomorrow, as we take a closer look at the Santa Claus rally.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

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The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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