The S&P 500 Death Cross Puts the "Santa Claus Rally" in Doubt

Some traders like to listen to classical music, others to jazz or the blues. But I'll listen to anything while I'm looking through my charts and data; it just depends upon the feel. So, this morning, when my Spotify shuffle went from Tony Bennett's "Swinging on a Star" to Ted Nugent's "Free for All," I had to stop.

Think about it: The markets are exactly that right now... a free-for-all. Was The Nuge hinting at some market savvy in a song?

Nah, of course not.

But there was this one line: "Here we go, look out below."

It's not nice, it's not pleasant, but it's the reality we've all got to deal with right now.

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So let's dive into a few fresh charts and talk about the very best way you can get through this and keep making money.

The Market's Usual December Mojo Isn't Working

Everywhere you look, you see skittishness and bearish developments. The charts are marred by technical damage.

That all-important market psychology? If it's not in a deep depression, then it's certainly got a bad case of the blues; the market "feels" terrible.

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And you might, too, if you'd wasted 11 months of your life.

  • The S&P 500 and Dow Jones are now officially down for 2018.
  • December seasonality is failing to spark interest in stocks.
  • Headline news continues to whiplash stocks daily.
  • The CBOE Volatility Index (VIX) continues to suggest there's more selling in store.

Maybe worst of all, the S&P 500 has "officially" completed a death-cross pattern (circled below). That occurs when the short-term 50-day moving average crosses below the long-term 200-day moving average.

Historically, a death cross develops near short-term tradable bottoms, but there's a problem with that in this scenario.

Here's the trouble...

If you recall, back in mid-November, the iShares Russell 2000 Index completed its own death cross (circled, below).

Now, historically, this means short-term bearishness, followed by gains two and three months later. In other words, the death crosses typically happened near the bottom of pullbacks.

But I also pointed out that last month's small-cap Russell death cross was the first that had happened in the month of November.

That twisted things up a bit, as a first-ever November small-cap death cross suggested that market weakness could extend into December, ruining the potential for the seasonal strength that leads to the traditional "Santa Claus rally."

Stocks will have a tough time finding footing without that historical rally as a base - a rally, going strictly by the calendar, should be well underway by now.

Then there's the problem of the Chicago Board of Options Exchange Volatility Index - the VIX.

Investors Just Aren't Worried Enough


By now, you might be tired of my talking about the fear index all the time, but it remains important, so I hope you're still listening. The VIX is just south of 25 as I type this. The lower VIX readings indicate that investors have yet to freak out about the sell-off. Way back in February, the VIX hit 50 when the S&P 500 dropped 12%.

Today, the VIX is at 25 and climbing while the S&P 500 is down more than 11% from its highs. Hmmm... Something's wrong here, no?

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The fact is that investors have too much confidence that this market is going to shoot for the moon at any second. Remember: Markets climb a "wall of worry" and slide down a "slope of hope."

And right now, this thing looks about as slippy (yes, you read that right - in Pittsburgh, we say "slippy") as the ski slopes I'll be hitting in Vancouver next month.

I'm normally an optimistic guy when it comes to the market, but everywhere I look the writing is on the wall.

That handwriting says...

"Hey, this could hurt, but you gotta do it: Cut your losses and toss out losing positions - even the ones you like. Tighten up stops. While you're at it, dig a little deeper and be prepared to shell out some dough on more hedges; it could be expensive, but it'll be worth it. Look down some dark alleys for juicy short side opportunities."

Like the "writing" says, hedging can involve a little extra expense, but the alternative is to be totally exposed to downside volatility. For instance, you might want to buy some really short-term index puts.

The safe gains you'll see will be well worth the extra money and effort as that old Grinch tightens his bony claws on these holiday markets.

I'm not going to argue with the handwriting any more than I'd be stupid enough to argue with the trend.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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