Today is a reminder that just because a “Santa Claus” rally is a statistical likelihood, it is far from guaranteed.
Considering that today was shaping up to be a quiet, uneventful day of holiday-period trading, I’ve been fielding more inquiries than I was expecting. The general question of course is “why the selloff despite the apparent lack of news?” As with most market explanations, the answer can be murky. The best I can figure out is that there are large accounts, pension funds and the like, who need to rebalance their holdings before year-end.
Can I be certain of this? I not been able to confirm first-hand that this is the case. But it is certainly a highly logical explanation. Considering how stock and bond prices have diverged over the past quarter and past, it is highly likely that stocks have become a disproportionately high percentage of a balanced portfolio. Simply put, if a fund desires a 60/40 ratio of stocks to bonds in its portfolio, and the stock portion has risen while the bond portion has fallen, they will likely find themselves with, say, 65/35 or 70/30. Getting back into balance would require selling stocks and buying bonds.
The following graphs show the divergence, using 10-Year Note Futures (ZN) to show prices, not yields (which move inversely):
3-Months, SPX (red/green daily candles), Continuous ZN futures (line)
Source: Interactive Brokers
Past performance is not indicative of future results
1-Year, SPX (red/green daily candles), Continuous ZN futures (line)
Source: Interactive Brokers
Past performance is not indicative of future results
The intraday trading action certainly suggests that a large seller is active. Note how two successive “buy-the-dip” attempts failed at the 5970 level, and how the second led almost immediately to new intraday lows. That is the sort of action that occurs when a rally attempt is squelched, causing the short-term speculators switch from buyers to sellers.
Intraday Chart, SPX (1-minute candles)
Source: Interactive Brokers
Past performance is not indicative of future results
Unfortunately, there is a flaw in the “rebalancing” theory: Bond prices haven’t been the inverse of stock prices since early in the session. It is possible that the overall selling in bonds remains substantial, or that the funds are simply raising cash. We see short-term rates lower on the day, so it would make sense if the funds raised from selling stocks are being deployed in cash equivalents. Or of course, the sellers may be waiting until their sales settle on Monday.
Intraday Chart, ZN (1-minute candles)
Source: Interactive Brokers
Past performance is not indicative of future results
The following graph shows the disruption to the Santa rally. Both SPX and NDX are trading below the lowest levels of Tuesday’s shortened session, though they are still up for the week. Most consider the Santa Claus rally to begin on Christmas Eve, so it is now no longer a rally. But as of midday we remain higher for the holiday week.
4-day Chart, SPX (1-minute candles), NDX (blue line)
Source: Interactive Brokers
Past performance is not indicative of future results
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
Disclosure: Bonds
As with all investments, your capital is at risk.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at the Warnings and Disclosures section of your local Interactive Brokers website.
Join The Conversation
If you have a general question, it may already be covered in our FAQs page. go to: IBKR Ireland FAQs or IBKR U.K. FAQs. If you have an account-specific question or concern, please reach out to Client Services: IBKR Ireland or IBKR U.K..
Visit IBKR U.K. Open an IBKR U.K. Account