Whether or not jolly old St. Nicholas delivers presents to Wall Street in 2014 might very well depend on upcoming economic data. That’s because the earnings calendar slows to a crawl.
What’s more, financial markets kill the lights early on Wednesday, and although the equities markets re-open Friday, it’s still an official government holiday—meaning nada on the data front. As a result, the week’s major reports are all front-loaded.
Indeed, the calendar’s page very soon turns to the final week of 2014. Like this week, it too will be abbreviated, with the markets closed on January 1. So, in such thin conditions, can big things happen? Interestingly, the six-day span from December 25 to the New Year is sometimes a bullish week known as a “Santa Claus” rally.
What’s Driving Santa?
Fair to say that market bulls may have opened their gift early—from the Federal Reserve. The central bank helped fuel a market rebound with a vote of confidence in the economy last week. With the Fed’s new “patience” wording to describe raising interest rates (likely beginning in 2015), watch for market participants to turn this word game into a guessing game—when will the Fed move and how fast?—in coming months.
Looking ahead, Tuesday packs most of the week’s economic data: reports on GDP, durable goods, consumer sentiment, and home sales. Weekly jobless claims will be released a day early on Wednesday. Weekly oil and natural gas inventory data, also released Wednesday, will be closely watched after recent volatility in the energy markets.
As for other drivers, earnings aren’t likely to be much of a factor. Retailer
Christmas Flurry
The drizzle of data follows one of the more volatile periods for stock trading seen all year, and the market is showing little sign of slowing. Compare the average daily move in the S&P 500 (SPX) during November, just 4.5 points, to December, when the average daily move was nearly 18 points. This month also included a 48-point rally last Thursday, the biggest single-day move for the S&P in 2014.
Figure 1: Daily moves for the S&P 500 picked up in recent weeks, coinciding with an uptick in... [+]
It’s pretty clear that the Fed’s choice to not upset the apple cart was well-received on the Street. But the timing of the Fed meeting may have had something to do with the market move. Last week was the “quadruple witching” expiration of certain stock options and futures. The overlap of these two biggish events appears to have caught some major market players wrong-footed, forcing a buying frenzy to cover short positions and possibly exaggerating the recovery. Will the market face a couple of tests now that it’s ready to challenge record highs again?
History Lessons
Clearly, historical (that is, actual) SPX volatility is once again elevated. Although we often keep tabs on the CBOE Volatility Index (VIX), keep in mind that it’s a forward-looking indicator that tracks expectations about future movement in the S&P 500. It’s any trader’s guess where market volatility might lie looking out on the calendar. That’s because VIX is derived from implied volatility priced into SPX options. But historical volatility (HV), on the other hand, is based on closing prices. It’s computed as an annualized standard deviation over a period of days. In case this type of math makes your head hurt, the chart in figure 1 conveniently plots the 20-day HV for the S&P 500. Notice that it fell to a low of just 5% through early September before spiking to recent levels of 16%.
VIX moved higher into mid-December as well. In fact, the market’s “fear gauge” jumped north of 25 on Tuesday for only the second time in 2014 (see figure 2). VIX has since dipped closer to 16 as the S&P 500 cobbled together a three-day, 100-plus point rally to flirt with fresh records.
Figure 2: The CBOE Volatility Index (VIX) spiked in early December before a sharp pullback. Data... [+]
As the news-driven week wrapped up on Friday and stock markets remained elevated, both VIX and bond yields did hang in higher than stock activity might have indicated. Something to keep an eye on.
As for the SPX, the close above 2070 was significant for the charts. If bulls believe that closing level was the start of a formidable run at 2100, then many could be convinced there really is a Santa Rally.
Good trading,
JJ
TD Ameritrade, Inc., member FINRA/SIPC. Commentary provided for educational purposes only. Past performance of a security, strategy, or index is no guarantee of future results or investment success.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
