Is the Santa Rally Done Already?

After US indices posted historic growth in November, some analysts wonder if the peak is already in or if there is a chance that momentum could fuel the SPX 500 higher.

It Can't Go Up Forever, Right?

US stock markets saw one of the best performances of the century in November, with the S&P 500 gaining almost 9% in a single month, adding $3.0T in equity. The primary driver was seen as the shift in expectations among traders that the Fed had reached the end of tightening and the next move would be a cut. A dramatic drawdown aided the move in the reverse repo facility at the Fed, as market participants shifted to buy into a broadening upswing in stocks despite the cooling macro data that came out through the latter half of the month.

Looking at what might happen for the rest of the year, the main catalyst that helped shares over the last several weeks is expected to continue, as the signs of a slower economy are seen raising bets that the Fed will shift to easing sooner. The S&P 500 is just 5% shy of hitting a new all-time record, and investors point to December as being historically positive as a series of technical moves in the market, such as portfolio rebalancing and tax considerations, lead up to the Santa Rally. The average return for the last month of the year is 1.3%, but December averages gains overall ahead of presidential elections, suggesting even better results.

Is Santa's Sleigh Arriving or Leaving?

Other analysts point to some of those data points suggesting that the Santa Rally might have already happened. While stock markets rose in the final week of November and starting December, volatility has declined. Other indicators point to a "muted" end of the year, with drawdowns in the reverse repo seen as sustaining banking reserves and reducing the risk of larger swings towards the end of the year.

The better performance last month might have already provided the bulk of the Santa rally, if not the entirety. According to some analysts, inflation keeps coming down, signalling that interest rates will be steady and the economic cooling will avoid a recession. The oversized rise in AI that sustained markets through most of the year has slowed as investors draw back from the sector and support the broader market. The bond market had fallen substantially in October and November as investors moved out of safe havens into taking risk assets. But that might simply mean there isn't much room left for the year-end rally to kick in without any major catalysts to push markets higher at the same rate as November's gains. Even a relatively modest growth in the S&P 500 over the coming weeks could leave investors somewhat disappointed compared to the recent historic gains.

SPX 500 Faces Double-Top Resistance

For now, the SPX 500 faces solid resistance at July’s peak around 4600, with further stabs above 4640 opening the door to 4750 and the record high of 4817. If the double-top proves stronger than expected, there doesn't appear to be strong support prior to 4410. Below there lies 4325 and the major swing of 4100.

Source: SpreadEx / SPX500

Key Takeaways

US stock markets had a remarkable performance, with the S&P 500 gaining almost 9% and adding $3.0 trillion in equity. The main driver was expecting the Fed to shift to easing despite cooling macro data. December is historically positive with the Santa Rally, but some analysts believe it may have already happened. Volatility has declined, and indicators suggest a muted end of the year. While modest growth in the S&P 500 is anticipated, it might not match November's gains.