ORLANDO, Fla. - As Wall Street reopens after Thanksgiving holiday, investors are looking for a final push to make sure 2022 doesn't become the bloodbath most had feared.
The S&P 500 rebounded 15% even though interest rates, Fed tightening expectations and recession probabilities have risen and the earnings growth outlook has deteriorated since hitting a two-year low in October.
Post-Thanksgiving trading history is on their side, and investors are determined to close the year with as much of their earlier losses as possible, and the good news is that post-Thanksgiving trading history is on their side.
According to Ryan Detrick, chief markets strategist at the Carson Group, in the 23 years since 1950 when the S&P 500 has been down year-to-date on Thanksgiving, it has risen 14 times in the remaining weeks of the year.
The average year-to-date losses on Thanksgiving days in these years was 10.5%, and the average rise post-Thanksgiving through December 31 was 1.5%.
The S&P 500's year-to-date loss on Thanksgiving Thursday this year was 15.5%, having been down as much as 27% in mid-October. We are entering one of the seasonally bullish periods of the year and given the likelihood of a continued peak in inflation and dovish turn for the Fed soon, we are on the lookout for another strong end of year rally, Detrick said.
If ever there was a year when Wall Street was primed to register an above-average whoosh in the last few trading weeks of the year, this is it.
Even beyond investors' instinctive FOMO fear of missing out on the upswing underway, positioning is extremely light and portfolios are historically underweight stocks. The upward bias that is currently driving the market is strengthened by this, regardless of fundamentals, such as the outlook for growth or interest rates.
As the current year winds down, investors will be reluctant to start a new year heavily over or underweight, because they will be inclined to reverse that skew.
According to Bank of America's latest global fund manager survey, investors' cash levels in November stood at 6.2%. The biggest underweight position of investors this month is in stocks, as it has been compared to average positioning over the past 10 years. Their equity allocation is 2.4 standard deviations below the long-term average.
Their underweight position in tech stocks is the largest since 2006 and is the largest since 2006.
BofA wrote in a monthly note that all manna from heaven for Q 4 trading bulls.
Wall Street's signals can be summed up as: keep calm and carry on buying into the year end, because the entire U.S. Treasury yield curve is inverted, some parts showing the deepest inversion in over 40 years.
The volatility gauges from Wall Street are some of the best ones you can look at. The VIX index of implied volatility hit a three-month low of 20.32 on Wednesday and has fallen six days in a row, the longest decline since May.
After significantly reduced their losses earlier in the year, equities are not pricing in the damage higher interest rates will do. They will do it at some point, but not yet.
Risk free assets are braced for the worst, risk assets aren't. Bond investors' glass is half empty, while stock investors are inherently optimistic and usually fail to heed the warning signs until it's too late.
Equity investors will keep dancing as long as the music is playing, as was the line from 2007 by former Citigroup CEO Chuck Prince. Fed may be alerted to the favoured yield curve alarm.