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Did Santa’s rally start early

Did Santa’s rally start early this December in a last-ditch attempt to bring some cheer to what has been a roller-coaster 12 months?

"I still think there's more to go," says BlackRock CIO of Fixed Income Rick Rieder on whether equities have room to rise even further. "We are just starting the implementation of I think people underestimate the amount of stimulus.

The UK FTSE is doing well in terms of December's equity gains, coming in at just under 5% for the month and at the time of writing this, as we head towards a Brexit 'Deal or No Deal' deadline and with the backdrop of the UK losing 819,000 paid jobs since the start of the COVID-19 pandemic. Hospitality has been the hardest hit sector, accounting for a third of the job losses, followed by retail, according to the Office for National Statistics. The uptick for the UK index as we get closer to a Brexit deal decision has also been while Sterling holds on to its relatively higher price levels, which in my opinion leaves the Service sector, Miners and Brent Oil being the major supporting movers for the index since March. The German DAX and French CAC are outstripping the UK FTSE gains for the year to date (YTD) but a no-deal outcome could bring these all back to parity as companies like BMW send out warnings around a no-deal Brexit.

Technically the UK100 (FTSE) is in a retracement of the 2020 range from the January high to COVID-19 pandemic Low in March. We're at the 61.8% Fib which coincides with the December 2018 swing low around the 6550 price level. The MACD is showing upward momentum and the fact that we took out the swing high from June 2020 means that we are most likely to push on up with the rest of the words indices, and at least test the weekly 200 simple moving average (SMA) which is just above the 7000 price level. If we look left into 2019 price action, we can see that the UK100 was basically a balanced market between 7000 and 7800 so without some sort of massive bullish up-swing in the UK economy, we could find major resistance at these levels and not find all-time highs that easily.

The DAX had suffered the most in November but has now pushed the Shanghai Comp to the bottom of the major indices for the last quarter, however, the UK is still the laggard trailing at -12.88% YTD. In comparison, the NASDAQ is the clear winner at a massive 40.84% increase YTD.

The Euro50 (Eurostoxx 50) is positioned in a similar way to the UK100 but is showing more bullish momentum both in the price action and with the MACD diverging more broadly. The Euro50 is going to find its next level of resistance around 3609 but if it is dragged up by the GER30 (DAX), the all-time highs are only a few hundred points higher. The weekly 200 SMA is resting above the summer highs and would act as the first significant support, with only a break of 2870 showing a structural collapse in the index.

The Ger30 is trading towards its all-time high of 13,286 and the MACD's moving averages divergence is suggesting that the move is going to accelerate with a breakout. Last week's low has become a support level but a close below that would then mean that the weekly 200 SMA is a target for anyone looking to buy a dip. The significant market structure low is 11,332 (November 2020 low) and a close below there would suggest a broader downtrend is in play.

Yesterday we saw the UsaTec (NASDAQ) and Usa500 (S&P500) indices trade higher with UsaTec pushing on the previous all-time high (ATH) prices for the 2nd time this month as Microsoft and Apple gains were indicative of a broader technology sector making new all-time highs. The markets paused for a while as we waited for the FOMC rate announcement and presser to see if there was going to be a policy change from the FED, but the main catalyst for the recent moves have been the indications out of the USA that there will be a bi-partisan agreement towards the further COVID-19 relief and stimulus packages.

With the NASDAQ up 40% for the year, it is hard to pick a level above as a target, so while we're continuing to make weekly highs, it is a case of buying the dip until there is a Government or Fed policy change or until a significant market structure is taken out. 12580 in the futures was intraday support yesterday with the significant low being the December 10th low at 12217. If prices were to drop below that low, we'd look to the swing from the week beginning 20th September, but this is unlikely while the MACD is showing bullish momentum and price action is also rising.

Next week we have Tesla joining the S&P500, so next Friday should be a volatile day, as that is also the quad-witching day for the Options markets too. Like the NASDAQ it is hard to put an upper level on the Usa500, so we have to look to last week's range between 3620.75 and 3714.75 for an indication of which way this is likely to breakout. The momentum and price action are both bullish so any chance to buy the dip intraday with a target at the top of last week's range should lead to more positive outcomes.

Neville Hornsey

Market Analyst


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