Last week, as traders were all on vacation, the market surged to 2600 as the “inmates ran the asylum.” The expectation of a better than anticipated shopping holiday season and ongoing hopes of “tax cuts and reform” lifted stocks higher. The current advance, is still working the general year-end pattern I laid out three weeks ago as shown below.
With earnings season nearing its conclusion, the markets will begin to focus more heavily on the economic data which has been weak as of late. Furthermore, with the Fed continuing to hike rates, and professional investors waiting to take gains until January, the risk of a Q1 sell-off has risen markedly in recent weeks. This is particularly the case given the short-term deviation from longer-term trends in the market.
The chart below shows the percentage deviation above the 3-year monthly moving average. Previous deviations have resulted in an eventual reversion to, or beyond, the 3-year moving average. A reversion to the monthly moving average currently would entail a -15.8% decline. While such a decline would not register as a “bear market,” which would require a 20% decline, given the record length of time without so much as a 3% correction, such a decline will certainly “feel” like a bear market.