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Ominous Bear Tracks Are Lurking Behind This Bullish Path

Traders should remain defensive here...

Santa finally made it to Wall Street. 

But instead of getting shiny new bicycles and virtual reality goggles as presents, traders got socks and underwear.

In other words… Yes, we got a rally. But it wasn’t very exciting.

It took a full seven days to play out. But the seasonal bullish period that includes the last five trading days of the old year – and the first two trading days of the new year – did manage to give a small gift to the bulls.

Thanks to Wednesday’s bounce, the S&P 500 finished the Santa Claus rally with a gain of 32 points – roughly 0.8%. That’s below the average 1.2% gain the bulls usually get during this time frame.

But a gain is a gain. And as the bulls who pay attention to such statistics will cheerfully point out… even a modest Santa Claus rally increases the chances of a positive return for stocks in 2023.

That’s not a guarantee, of course.

We can scroll through history and find plenty of examples when a Santa Claus rally did not lead to a positive return for the year (2001 being a notable example). 

But we’re talking about probability here. And the statistics show that whenever Santa shows up, stocks tend to be bullish.

But there’s one nagging problem…

The long-term monthly chart of the S&P 500 still looks vulnerable to a waterfall decline. Take a look…

The index has been trading below its 20-month exponential moving average (EMA – blue line) for several months.

By itself, that’s bearish. The S&P 500 needs to close above its 20-month EMA at the end of the month to create a bullish pattern on the chart.

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More important, though, is the 9-month EMA (red line) has closed below the 20-month EMA for three straight months.

This sort of “bearish cross” occurred in 2001 and in 2008 – just before the market suffered “waterfall declines” that sent stock prices sharply lower.

The longer the 9-day EMA spends below the 20-month EMA, the greater the chances of a waterfall decline. After three months of a bearish cross, the probability of such a decline is increasing.

The Santa Claus rally that just occurred is a modestly bullish event. But it pales compared to the potential damage inflicted by a waterfall decline.

So, until the long-term monthly chart of the S&P 500 can shift back into a bullish setup, traders should remain defensive. 

Stocks are still in a bear market. And it looks like the bear may be setting up to take another swipe.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In today’s mailbag, readers thank Jeff Clark and his team for their positive experiences with the trading services

Hi Jeff, I wanted to let you know how much I appreciate you, your service, and the daily and mid-day updates. It has all been super helpful and has supported my successful trading strategies. Happy New Year to you and your family. And I’m wishing you all the best that 2023 has to offer!

– Elaine R.

I’m very fortunate and thankful to have mentors of your caliber for guidance and education. You folks are all the best! It’s all much appreciated. I’m wishing you all the best in health, happiness, and success going forward in 2023 and beyond! –

– John B.

Hi Jeff. To you, your team, and families… I wish you a Happy New Year. Thank you for the hard work you and your team have done in 2022. I’m now looking forward to a great 2023 year.

– Tony S.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.