Thanks to seasonality tailwinds and some stability in oil prices, stocks bounced higher on Tuesday.
In the end, the Dow Jones Industrial Average gained 1.1%, the S&P 500 gained 1.1%, the Nasdaq Composite gained 1.3% and the Russell 2000 gained 1.1%. Crude oil surged 5.9% to close at $38.86 a barrel, lifting energy stocks.
The “Santa Claus rally” is in gear, with the Dow Jones making a march on the 18,000 level.
However, the rally is likely to succumb to renewed selling pressure in the second week of January as the release of the December jobs report, data on the outcome of the holiday shopping season, and a return of rate hike worries adds to lingering concerns about corporate profitability, slowing U.S. economic growth, valuations, and low commodity prices.
But for now, the bulls are in control with the intention of pushing the major indices into the green for the year. The S&P 500 is back in positive territory for the year-to-date; the Dow is down 0.6%.
One possible hint of concerns to come is what’s happening in Treasury bonds, with the iShares Barclays 20+ Year Treasury Bond (TLT) dropping 1.7% today in what looks like the start of a breakdown from a two-month rise. If so, this could jeopardize the stability in long-term yields that’s been seen since late 2014.
Higher Treasury yields will put fresh pressure on vulnerable areas of the credit market, especially high-yield corporate bonds. Specifically, those in the energy sector that have been slammed on fears of rising defaults in the U.S. shale oil space.
For short-term traders, stocks like International Business Machines Corp. (IBM) look ready to enjoy a surge of Santa-fueled buying. I’ve recommended the Jan $140 IBM calls to Edge Pro subscribers.
However, the medium-term outlook remains troublesome. Conservative investors should remain cautious.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
