Santa Rally Gyrations

FED Rate Hike: A Boon Or A Curse?

Probably neither: The last 5 trading days are best described as aberrations of human behaviour. The price gyrations in financial markets have been extreme, trading volumes huge, mostly denoting the reactions of ill advised punters. 

During the last 8 months, asset prices had been adjusting in anticipation of a rate hike of 0.25%. When it was announced on the December 16th, some punters thought a new rally is starting. After all, it had been 7+ years since the last rate increase and surely, the economy looks strong enough to warrant it. Three days later, a counter sentiment created massive selling pressures, and global market indices returned to square one, most of them. 

 World Indices

S&P500, Dec '15 correction and
short term outlook; source: Chartnexus

Actually, the turning moment came on Monday, the 14th, late in the day and - two days BEFORE the rate increase was announced. To me the subsequent bounce looks more like a cyclical rebound from deeply oversold positions, - unperturbed by the prospect of the much talked about shake out in financial markets following the interest rate rise. The bounce in US indices and elsewhere was huge, adding 3% or more to values in 3 days. Thursday and Friday trading, however, wiped out the entire advance. 

Russell 2000, December correction and beyond.
Source: Chartnexus

The Russell 2000 (US small caps index) displays a much more bearish sentiment, and for longer than December, even August 2015. The bounce from December 14th is timid by comparison and the path to the end of the year less promising. Small caps is not the place to be right now, at least not till end of January. 

NASDAQ 100, December correction and beyond.
Source: Chartnexus

The NASDAQ 100 displays the most promising set up for a continuation of the Santa Rally. The correction in December mirrors the one in November, 5.5% up, same peak level, 5.5% down, a double bottom, too and the first initial bounce of 4.5% from December 14 was the strongest of all major US indices. By Thursday, it had gone up well beyond my targets for December (see yellow arrow) though I think the advance from hereon will be somewhat shallower than the first euphoric rise. 

NIKKEI 225; December correction and beyond.
Source: Chartnexus

The NIKKEI 225 has a similar positive set up. From last Tuesday to Friday, it almost recovered all the losses of -7% of early December, only to fall down two thirds of the way by end of the Friday's trading. For the overseas investor, a bouncing Yen reduces the overall volatility a bit: the Yen often strengthens against the USD when the NIKKEI falls and vice versa. 

As for Europe, the December pickings in equity will disappoint. At best, the indices will deliver about 4% from the present low level. My general assumption for December is unchanged: Overall we will end up not far above the current price levels with only few exceptions. 

Another distracting factor will be the ongoing augmented volatility in currencies. 

The USD versus World Currencies

Between 15th and 17th December, the USD advanced some 2%, too. Which means all overseas investors had an extra return factor, but USD investors failed to harness the local gains in Europe and Asia unless they hedged returns to the USD.

Market Volatility and Correlation

As you can see from the examples above, the volatility was not limited to equities. Most investment grade bond prices surged (!), too - as did the USD before turning in the same way as equities. So much correlation is rare. Insisting that the turn was simply a belated reaction to the FED announcement means overlooking the underlying drivers. Could it not have been just a deliberate exercise of a well calculated exit on Thursday? 

But whereto now?

"Santa will have a tough time this year", I wrote in my last post. But returning to the low or even lower than on the 11th/14th December is a big sign that Santa isn't quite finished. So, I maintain that the coming week will be strong and positive, and even the last week of the year is likely to hold prices high. 

So, - happily go home and celebrate your holidays, and the NEW YEAR, as stylish and enjoyable as you want, with the people you cherish. Just make sure you sober up by January 4th. The markets might just provide a rude awakening...

It is the January prospects, which I dread. They could turn out to be particularly dismal in the markets I have highlighted previously. And so, this post is not the last one in 2015.  I have to write one more before NEW YEAR, when I can pinpoint the likely damage. 

All the best for the Jolly Season, - probably not a WHITE ONE (at least not in Germany), and come visit my blog on NEW YEAR's DAY.