Santoli: Another 'sneaky' rally emerges, but some reasons for worry

When they don't let you in, sometimes you need to barge through the door, I guess. For a second day in a row, a quiet but sneaky-strong morning for stocks gave way to a lurch forward for the indexes. Are there still enough under-invested, over-defensive investors out there looking to add exposure to stocks who were counting on what the almanac says is often a dip in early December before the seasonal year-end rally? Was the ECB meeting yet another spot on the calendar that gave some traders pause and then passed without incident? Could be.

Here's what I'm watching heading into the closing bell:

It's hard to quibble too much with the posture and gait of today's little rally. The leaders are in the "offensive" sectors (financials, semiconductors, transports, materials). Small caps have re-boarded the momentum train. The average stock (as gauged by the equal-weighted S&P 500 ETF, ticker RSP) is handily outperforming the standard index. And high-yield debt is again outperforming Treasuries, continuing a trend of credit-market strength that has allowed and validated gains in stocks. Junk spreads are back to where they were in early 2015. Then again, so are equity P/E multiples, and that's about where stocks quit going up. Yes, we do need the promised return to earnings growth next year.

That's the good news. The bad news is that good news can become too good for investors' own good, if enough of them start to believe it. The tape looks stretched to the upside in the short term, overbought by a variety of measures. This is not the same thing as saying the market is at or near a dangerous peak. But combined with some sentiment indicators that have been suggesting some giddiness (high CNN Money Fear-Greed Index, low put-call ratios, extended Ned Davis Crowd Sentiment Poll) it suggests the market should probably find an excuse to stall or settle back before too long. Or, if we continue higher, that any gains from here are more likely to be retraced further on.

Some chatter today about the CBOE Volatility Index rising above 13 even as stocks rally. This goes against the prevailing relationship and maybe suggests traders are looking at the intraday jumpiness of stocks and low absolute levels of protective-options prices and buying some insurance. It's definitely worth tracking, though the options watchers I trust say the VIX won't raise serious alarms unless it begins an uptrend and specifically unless/until it gets above about 15 (from near 13 now).

CBOE Volatility Index - Intraday

Questions for the coming weeks: Will the year-end seasonal upside bias hold to form? An array of "seasonal trades" that have failed lately: January wasn't strong and small-caps didn't outperform; Sell in May didn't work either from Nov. 2015-April 2016 or from May-Oct; September wasn't as weak as "promised." Not saying these patterns are broken or useless. But, as ever, seasonal factors are climate, not weather. They tell about broad tendencies, but don't give much help about how to dress tomorrow.

Question will be whether we'll be set up for another January New Year's hangover (have had three straight weak Januaries). There's plenty of time to kick that around over the holidays.