Trying Again For A Rebound Effort (And Santa Claus Rally)

The Santa Claus rally period encompasses the last five trading sessions of the year and the first two trading sessions of the new year. Today is the last day of that “rally period,” and Santa Claus is hanging on by a thread. When the period began, the S&P 500 stood at 3,822.39. It closed yesterday at 3,824.14.

A net gain over the seven-session stretch is considered to be a good sign for how the market will trade in the early part of the new year. Of course, 2022 did not live up to that standard, so it is perhaps best not to have any pre-conceived notions about 2023 based on what happens — or doesn’t happen — today.

What’s happening now is that there is a modestly positive bias in the futures trade.

Currently, the S&P 500 futures are up 20 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 78 points and are trading 0.8% above fair value, and the Dow Jones industrial Average futures are up  122 points and are trading 0.4% above fair value.

That disposition looks a lot like yesterday, which did not live up to the pre-opening hype. Sellers were quick to come in and squash the opening rally effort, recognizing the vulnerability of current 2023 earnings estimates and expressing continued valuation concerns.

Those views were wrapped up in worries about economic growth prospects. Dow component Salesforce (CRM) didn’t assuage those concerns today with an announcement that it plans to reduce its workforce by approximately 10% and make select real estate exits and office space reductions.

From a micro standpoint, that restructuring move will help underpin corporate profitability, so shares of CRM are up 4.4%. From a macro standpoint, however, it is a step in the weakening direction.

The Treasury market should draw a measure of support from that connection, but to be fair, the bulk of today’s early gains were forged overnight following some relatively pleasing December Services PMI readings from the eurozone and some encouraging inflation reports out of Germany and France that supported the peak inflation narrative.

Here again, though, the improved inflation readings stemmed in part from weakening demand. Still, it is much better to see disinflation at this point than more inflation, but if weakening demand is a driver of disinflation, one must also account for the likelihood of weaker earnings growth.

The 2-yr note yield is down five basis points to 4.32% and the 10-yr note yield is down 10 basis points to 3.68%.

The drop in long-term rates is providing a little clearance for some rebound-minded activity in the growth stocks, but the issue there is one of duration, as in how long will the rebound last? It didn’t last long yesterday.

Some gains in the mega-cap stocks are helping to underpin the equity futures market this morning (just as they were yesterday), but Dow component Microsoft (MSFT) has been excluded from the mix. It is down 2.7% on a UBS downgrade to Neutral from Buy that was attributed to concerns about weaker growth for Azure and Office 365.

Separately, market participants will soon have some additional insight on growth prospects with the release of the November JOLTS – Job Openings and December ISM Manufacturing Index reports at 10:00 a.m. ET. Those reports will be followed at 2:00 p.m. ET by the release of the FOMC Minutes for the December 13-14 meeting, which could offer some new insight on when a pause in the Fed’s tightening efforts could be likely.

Today’s trading action, then, is bound to be interesting, and not only because it will determine if Santa Claus came to town.

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Originally Posted January 4, 2023 – Trying again for a rebound effort (and Santa Claus rally)