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A ‘Santa Claus Rally’ for the Stock Market?

by Nathaniel Whittemore
December 5th 2020

Today on the Brief:

  • Payrolls report underperforms expectations
  • More
331 Welcome back to the Breakdown with Me and L. W. It's a daily podcast on macro Bitcoin and the big picture power shifts remaking Our World. The Breakdown is sponsored by crypto dot com. Next Addario and All Nodes and produced and distributed by Coindesk. What's Going On, guys? It is Friday, December 4th, and today we're talking about whether there will be a Santa Claus rally for the stock market. First up, however, let's do the brief first upon the brief today, the new payrolls report for November is out, and once again we have under met expectations. Bloomberg's piece says. US hiring rebound markedly slows amid surgeon virus cases So nonfarm payrolls increased by about 245,000 this month. Estimates had been for a gain of 460,000. The unemployment rate dipped 0.2% to 6.7%

. And we saw most disturbingly, a significant decline of Americans actually participating in the labor force. So basically, this is just a group of people who have now taken themselves out of the job search altogether. So how are markets responding? While interestingly, the Treasury yield is up, that means less demand. For Treasuries, that usually means a sense that things were getting better, but it's complicated. Gila Base, who is Janey's chief fixed income strategist, says nonfarm payrolls this morning. We've got a classic problem. A strong report is a sign of stable economic growth. Despite headwinds, a week report could be the catalyst needed for compromise over stimulus. It's the muddy middle that gets complicated. He then followed up once the report was out. Post nonfarm payroll curve steepening is a clear bet on fiscal deal moving closer. In other words, he's saying that the Treasury yield curve going up is a signal that people think that this means that stimulus is on the way. This was

echoed by Jeffrey Rosenberg, a senior portfolio manager at BlackRock, who said, The market reaction is really looking through this to the policy response. So then how our stimulus talks going? While The Wall Street Journal headline reads Coronavirus stimulus talks moving in the right direction, that statement, the entire article and everything that they have said about it plus $4 or so will buy you a tall gingerbread latte. In other words, who knows if it's actually getting closer. Second on the brief today, Spotify is looking for a new crypto and payments director. According to a new announcement, Spotify is looking for an associate director to join its payment strategy and innovation team. This job will do things like access the payments landscape, but also quote lead its day to day engagement with the Liberal association, which is now obviously the D M Association. Spotify is one of the 27 members of that GM association, and why it's interesting to me is that, frankly, it's kind of hard to remember sometimes that GM is still alive. Project It has just been so

continuously hammered with so much turnover, so much change in what it's expected to be. It's fallen so far from the grand ambition that Facebook had when they announced it. But again, it's hard to remember in some ways or take it as anything other than sort of the shell of what might have been. However, their members still do represent a huge number of Internet citizens. So if the thing actually starts cooking, maybe it is going to deserve a closer look again. Last up on the brief today, lame duck crypto legislation coming. While we've all been yammering about the stable act, we've for gotten that literally. Just last week, there were rumors abounding that the U. S Treasury was going to drop some onerous late term legislation around self custody. Office of the Comptroller of the Currency Chief Brian Brooks went on CNBC today to discuss. So let's listen. E wanted first start off by asking you about a tweet that your former boss that coin basis CEO Brian Armstrong sent out last week. And he said that the Treasury could be quote planning to rush

out some new regulation regarding self hosted crypto wallets before the end of the term. Is that true? Yeah. Look, Melissa, you know, rumors abound in Bitcoin more than almost any other place. What I would tell you is we're very focused on getting this right. We're very focused on not killing this, and it's equally important that we developed the network's behind Bitcoin and other Kryptos as it is that we prevent money laundering and terrorism financing. So believe me, there's a balance here, and it's gonna work for everybody. So that's a neither yes or no answer to that. Should we be expecting some new regulations by the end of the trump term, I think you're going to see a lot of good news for crypto. By the end of the trump terms, some of it's gonna have to do with banks connecting the Blockchain. Some of it's gonna be more clarity around the nature of these assets, so believe me, there's gonna be very positive messages coming out at the same time. It's a dangerous world out there. We have to be honest about that. But nobody's gonna ban Bitcoin. Nobody's gonna ban some of these transmission technologies. I think it's gonna be a lot less bad than people worry about. On the one hand, I like some part of what we're hearing. On the other hand. To be honest, that wasn't that reassuring. That said

, it is interesting that he's implying that we're going to get further clarity with crypto banking, and I wonder to what extent that stable act folks, the people who introduced the stable act, know what's coming and wanted to get out ahead of the narrative with the stable act, so that going into a new Biden administration, any new session of Congress, we have these competing forces, whatever Brooks and the 0 cc are going to push through in the last few weeks of the Trump administration versus what those behind the stable act want to see. Instead, this episode is brought to you by crypto dot com, the crypto super app that lets you buy, earn and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto dot com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the APP, you can apply for the crypto dot com metal card, which pays you up to 8% cash back instantly on all purchases. Reserve yours in the crypto com app today, looking

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on all nodes dot com, the platform preferred by people who make a difference. So visit all nodes dot com and use the promo code Coindesk three To get started for free today, let's shift to our main topic. A Santa rally for the stock market. First, let's discuss what a Santa Claus rally is. The concept is that there's a tendency for the stock market to rally over the last few weeks of December into the new year. You might be asking, Is this a real thing? and the reality is, yes, it is. More than two thirds of December's dating back to the 19 sixties have resulted in positive gains to get more specific, according to the Stock Trader's Almanac. The last five trading days of the year and the first two of the next year are the period in question. And since 1969 the Santa Claus rally has yielded positive returns in 34 of 45 years, averaging a cumulative return of 1.4%. The next obvious question becomes. What

are the reasons that people think this happens with such consistency? And there are a few answers. The first is increased holiday shopping, right? Check that cash register. It's good for business. The second is optimism fueled by that same holiday spirit. People are feeling good. The end of the year is coming in new years. Beginning, optimism tends to abound in those times. We have an entire canon of literature and movies and culture that tell us that story over and over again. Every year. A third is Wall Street bonuses, and I love how many different narratives Wall Street bonuses, impact. I mean, I remember how many times we've talked about Wall Street bonuses in the context of Bitcoin as well. Lastly, there's a sense that institutional investors settle their books go on vacation and chill, letting retail frolic in this last period. And, of course, retail is historically more bullish, more excited, more willing to spend on these stocks. Oh, and I guess there is actually one Maura's well, which is the anticipation of a January effect. And at this point, you may just think we're

naming Bs and you wouldn't be wrong. But the January effect is a rally that follows a theoretical December selloff, when investors who are tax loss harvesting to offset realized capital gains prompts a sell off from 1928 to 2000 and eight. The S and P 500 rose 56 out of 91 times in January, which is 62%. So what is this year likely to be like? While there are two big reasons that people think we could still see some sort of positive December action, the first is the vaccine roll out. Although Pfizer has had to slash its targeted vaccine roll out at half after finding raw materials and early production did not meet its standards. There's still a lot of optimism about vaccines actually coming to market. The second is stimulus. We mentioned the status of stimulus above, and while I was being snarky, it does seem like it's moving closer. And perhaps the miss numbers on the job report are part of a catalyst to finally get a deal done. However, a new Bloomberg piece points to five charts that suggests that we may not, in fact, be in store for a Santa

rally this year. Let's go through those charts and find out why we might be all in for lumps of coal in our stock market stockings this year. The first chart Bloomberg points to is the Bollinger Band and a Bollinger band are a type of price envelope that defines upper and lower price range levels. Bollinger bands used to parameters, period and standard deviation, with the default value being 20 for period and two for standard deviation. Basically, this is how this indicator works, and this is from Fidelity. When the band's tightened during a period of low volatility, it raises the likelihood of a sharp price move in either direction. This may begin a trending move when the band separate by an unusually large amount, volatility increases and any existing trend may be ending. Prices have a tendency to bounce within the band's envelope, touching one band, then moving to the other. These price swings can help identify potential profit targets. So what does Bloomberg's targets say? Then? Well, November closed above its upper

band, suggesting that we may be in for a period of consolidation following each of the last three times this happened. US. Stock benchmarks posted declines for at least the next two months. Our second Nautilus chart is the options chart. The CBO. He has a gauge that measures the volume of bearish options bets relative to bullish options, bets and the indicators five day moving averages currently at its lowest level in 20 years, meaning extreme investor positivity. Ironically, this could be a contrarian signal. The third chart is broad participation, and the question here is what's left to gain or, more specifically, who has room to run. Currently, 93% of stocks in the S and P 500 are trading above their 200 day moving average, which is the highest in seven years, and so overall, there's a sense that this is an indicator that there's really no more room to move in this particular rally. Related is the fourth chart presented by Bloomberg, which is stretched tech. This has been

a concern for a while now that the tech rally that is defined so much of the traditional markets this year has gone too far. The NASDAQ 100 is up two standard deviations above its 50 day moving average, which really suggests that maybe it's overbought. That said, Tech wasn't the driver in November. Instead, November was all about cheap value stocks that had fallen too far relative to their technology peers and had some room to catch up. Finally, the last measure that Bloomberg points to it they call the Shriller Schiller, and this is about Robert Shiller's cyclically adjusted price to earnings ratio. This is a more fundamental measure of whether stocks are overvalued or not, and by this measure, US stock valuations are back above their 1929 peak just before the Great Depression. The good news is there still far below their dot com all time highs, but they're still really, really high, giving one more piece of evidence that again the markets may be out of sync with reality at the same time when it comes

back to it. Like so much of this year, these markets are incredibly narrative driven, and you have this radical shock, this total shift in demand. That's happened because of this exogenous factor that no one saw coming that literally shut down the economy. And now we're coming into a point where you have one more stimulus on the way and too much more importantly, in many ways, ah, vaccine, which, when it is fully deployed, could unleash a huge amount of pent up demand. I think ultimately what's happening right now is that markets are betting on those two factors aligning in the short term stimulus that helps things rise and stay afloat as that vaccine gets rolled out and then ultimately a rip back up. As people start to get out, move again by again, travel again, they get less scared. They move from resilience to consumption once more so whether the market is right or wrong about that, whether we'll see an actual December rip, I don't know. But I thought this would be a fun way to explore what's going on in

the side of the market that we don't spend as much time on here on the breakdown. But still I think really matters. So I hope you had fun with this one today. I hope you're headed to a great weekend until tomorrow, guys, be safe and take care of each other piece.

A ‘Santa Claus Rally’ for the Stock Market?
A ‘Santa Claus Rally’ for the Stock Market?
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