Investors Clearly Don’t Believe in Santa Claus: Analyst

According to Bank of America's chief Stephen Suttmeier, stock market technicals show investors have little faith in a year-end rally, sometimes known as a Santa Claus Rally. “Investors have given up on the December rally. Sentiment shows that tactical contrarian bullish levels of fearfulness are building. The 3-month VIX relative to the VIX triggered a tactical capitulation signal last week and the 5-day total put/call rose above 1.0 for the first time since the 2020 U.S. Presidential Election. In addition, AAII Bearish Sentiment hit a 2021 year-to-date high in bearishness last week,” said Suttmeier in a new research note to clients on Tuesday.

A Santa Claus Rally occurs when stocks rise during the final week of December and January's first two trading days. Its precise reason has never been fully explained; hypotheses vary from year-end tax considerations to people using their large bonuses to invest in equities.

However, as TheStreet's historical market data analyst Mark Hulbert notes, the evidence supports the significant likelihood of a Santa Claus Rally.

According to Hulbert, since 1896, the Dow Jones Industrial Average has returned 2.5 percent on average in November and December. This is more than the 1.3 percent average gain over the previous two months.

It won't be unexpected if there isn't a Santa Claus Rally this year. Since Black Friday, stocks have experienced dramatic swings due to increased fears about the Omicron variant and concerns about peak liquidity as the Fed plans to cut its asset purchases. Despite a solid two-day comeback this week, the S&P 500 is still off more than 1% from its November 18 peak. Tesla, which is down 15% from its November 4 high, is one of the few high-flying tech equities with sluggish buying. Salesforce's stock has dropped 13% since its peak on November 8.

Suttmeier of BofA believes that the stage is being set for a mixed start to 2022.

"The cyclical market for U.S. equities from the 2020 COVID-19 level, in our opinion, is showing signals of wear and tear. This puts the year 2022 in doubt. Bullish breakouts across indices and indicators in late 2020 confirmed a solid cyclical bull market and the possibility for the March 2020 surge to continue. Late 2021, on the other hand, is a far distance from where the technicals were a year ago. Many indicators spanning breadth, volume, credit, and financial circumstances have matured signals as we approach 2022, indicating a bearish fall,” Suttmeier warns.