These Five Charts Throw Cold Water on Chances of Santa Rally

With investors primed for a year-end rally in risk assets -- courtesy of a vaccine rollout and the chance of a stimulus breakthrough in Washington -- a number of warning signs are flashing that the record-breaking U.S. equity run is overextended.

Here’s a look at five that suggest a so-called Santa Claus stock rally in December may not be so easy to come by:

Pass the Bollinger

A stellar November helped the S&P 500 Index close above its upper monthly Bollinger band, but that may signal a period of consolidation is ahead. Following each of the last three such occurrences, the U.S. stock benchmark posted declines for at least the next two months. The gauge climbed 11% last month and has started December with a more than 1% gain as traders bet on a return to normal for the global economy next year.

These Five Charts Throw Cold Water on Chances of Santa Rally

“It’s going to be difficult to expect too much near-term upside without some sort of further pause or pullback,” wrote Saut Strategy’s Andrew Adams in a note.

Option Fever

A Cboe gauge measuring the volume of bearish options bets relative to bullish ones for U.S. single stocks is also highlighting investor positivity at extreme levels. The indicator’s five-day moving average has hit its lowest level in 20 years. The gauge can often be a contrarian signal for equity markets.

These Five Charts Throw Cold Water on Chances of Santa Rally

Broad Participation

The equity rally has been so broad that almost every stock in the U.S. benchmark is in a technical uptrend. A whopping 93% of stocks in the S&P 500 were trading above their 200-day moving average this week, a level used by technical analysts to determine whether a stock is in an uptrend. That’s the highest in seven years.

These Five Charts Throw Cold Water on Chances of Santa Rally

Stretched Tech

Although technology shares have taken a back seat to the recent market narrative looking for gains in cheaper value stocks, the Nasdaq 100 Index still managed to hit a fresh record high Thursday. The tech-heavy gauge -- up 43% this year -- is now trading about two standard deviations above its 50-day moving average, a signal its rally may have gone too far.

These Five Charts Throw Cold Water on Chances of Santa Rally

Shriller Shiller

Some investors like a more fundamental approach to judge if a market is overextended, even if the use of Yale professor Robert Shiller’s cyclically adjusted price-to-earnings ratio may reignite old arguments. By this measure, U.S. stock valuations are back above their peak seen in 1929, just before the Great Depression (though still well off dot-com-era highs).

These Five Charts Throw Cold Water on Chances of Santa Rally

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