Market Analysis

Dirty Rally

The case for a dirty rally to come: Why a dirty rally? Because investors just dumped stocks (see also: Worst redemptions on record) on the heels of massive warning signs (see also: You have been warned) and unusual steep corrective activity this month resulting many indices making new yearly lows in December.

The last time yearly lows were made in December was in the year 2000. A point I discussed with Brian O’Sullivan this morning:

A point of potential consequence. Back then that December low produced a 10% rally into late January for a lower high.

The context of heavily oversold readings into this Fed meeting coupled with the historical analogy of the 2000 example offer the prospect of a potential repeat of something similar.

Here’s the 2000 chart:

Note a blow-off move in March, a quick and fast correction, then a multi month crawl to near new highs ($DJIA did make a new high on October that year – sound familiar?) and then a very choppy correction into September, October, and November followed by new yearly low in December.

No markets are alike and there are differences of course, but it was the last year we saw a yearly low in December. Specifically December 21. This week if you compare calendars.

And then guess what happened? A 10% market rally into late January:

And only THEN the bear market unfolded that lasted into 2002/2003.

Also note the big scary sell-offs  around the New Year back then.

History doesn’t necessarily repeat itself, but sometimes it rhymes.

The Fed right now is under incredible pressure, not only challenged by a slowing economy and stressed bond and stock markets, but also by a President who’s not keen on the Fed’s $50B per month QT program:

The Fed’s independence is in question if they show signs of succumbing to political pressure. Yet a steepening selloff may put Jay Powell’s Chairman role in question.

Beyond the Fed speculation there’s also a technical foundation that suggests that a very sizable rally may be emerging.

All new lows are showing positive divergence.

Case in point is the $BPSPX chart:

A rally is urgently needed as markets are breaking their long term trend lines and $SPX has traversed deeply into the larger risk zone:

At this point this is purely speculative as no confirmed low is in place. We’ll likely know more tomorrow, but know that, unless the Fed causes the market further consternations, there are multiple factors in play that suggest a sizable counter rally could be in play.


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Categories: Market Analysis

17 replies »

  1. sincere thanks. came across your blog a few weeks ago. it’s great. Powell stood in front of his bathroom mirror this eve rehearsing his lines that will tomorrow give the market a gasp higher. Post fed event I plan to go long through quad witch and christ-mas.

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