Market Divergences Grow as Stocks Break for Christmas

Stocks finished mixed on Wednesday as markets closed early for Christmas Eve. But it was enough to put the wraps on the strongest six-day winning streak since 2010, catalyzed by last week’s comments from the Federal Reserve that it would be “patient” with its rate hike campaign.

In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 lost a fraction, the Nasdaq Composite gained 0.2% and the Russell 2000 gained 0.4%. The indices finished off their highs after a bout of late session selling pressure trimmed gains.

Markets will be closed on Thursday and will reopen normally on Friday.

Historically, the week before Christmas is one of the best stretches of the year for the market. And stocks certainly made good on that, with the Dow rising more than 1,000 points to set a series of new record highs.

Investors have been motivated by a stabilization in oil prices, stabilization of the situation in Russia, positive U.S. economic data, the Fed, and ongoing hopes that the European Central Bank will unleash a government bond buying stimulus program.

But along the way, the evidence has grown that things have come too far too fast.

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For one, major long-term breadth measures, such as the number of new highs and the NYSE’s advance-decline line, peaked in the early summer — suggesting that the market gains of the past few months have come on a narrowing base of participation.

You can see this in the way the NYSE Composite Index, shown above, is still contending with triple-top resistance from highs set in July, September, and late November.

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Stocks have also separated from other asset classes, such as high-yield bonds and commodities. The chart above shows how the Barclays High Yield Bond ETF (JNK) remains within the confines of a medium-term downtrend that started back in July and that the rally off of the mid-December lows — which has supercharged stocks over the past week — merely looks like a short-term relief rebound.

And finally, the stocks are looking stretched relative to the fundamentals.

Cyclically-adjusted price-to-earnings multiples on the S&P 500 have only been higher in the runup to the 1929, 2000, and 2007 market peaks. Currently, the multiple stands at 27.1x versus a long-term average going back to the 1880s of 16.6x. So stocks are more than fully valued.

Jonathan Glionna at Barclays Capital is looking for S&P 500 earnings growth to slow modestly next year for an end-of-year target of 2,100 — less than 1% from Wednesday’s closing level. ‘

According to the folks at SentimenTrader, the CBOE Volatility Index (VIX) — dubbed Wall Street’s “fear gauge” — has only increased four times in 28 years in the two days ahead of the Christmas break. But from the close on the day before Christmas to the end of the year, the VIX jumped 24 out of 28 times for an average gain of nearly 9%.

So watch for a return of the downside pressure starting on Friday.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/market-divergences-grow-stocks-break-christmas/.

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