Stock market's snapback makes a Santa rally more likely, traders say

Published Tue, Dec 22 20206:44 AM ESTUpdated Tue, Dec 22 20207:17 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

A resilient stock market shook off much of its losses Monday, signaling there's a good chance a Santa rally will lift the market higher into year-end. The Dow Jones Industrial average closed up slightly, but it recovered about 450 points from its worse losses. The Dow ended the day at 30,216, up 37 points, while the S & P 500 was at 3,694, off 14 points or 0.4%. The Nasdaq was off 13 points to 12,742. Stocks sold off sharply in early trading on news about more lockdowns in the U.K. because of a mutation of the virus there. Some analysts said the rebalancing of the S & P 500 on Friday afternoon, to include Tesla for Monday trading was also a factor, since index investors had to sell other S & P stocks to make room for the electric car maker. "The Santa Claus rally was in jeopardy on the open but remains intact with the way weakness was absorbed across the sectors," said Scott Redler, partner with T3Live.com. "Tech had a really nice move off its lows, but a lot of things did." Tech was down sharply early in the day but rebounded to close with a 0.07% gain. The only sector to perform better was the financials, up 1.4%. The Santa rally is traditionally the final five trading days of the year and the first two of the nee year. That would put the Santa rally period between Dec. 24 and Jan. 5. If the market loses ground during that time, it's a negative signal for the market. Thus the old Wall Street adage: If Santa should fail to call, bears may come to Broad and Wall. Tom Lee of Fundstrat said he believes the rebalancing of the S & P 500 had more to do with Monday's sell-off and volatility than the new worries about the virus. "There's already been mutations that have been more contagious," he said Monday. "There were so many liquidity oddities because of Tesla being added on Friday. I would suspect that has a lot to do with today's sell-off." Lee expects a correction in the first quarter, but not yet. "I think there's still a lot of gas left in the tank for a year-end rally," said Lee. With the virus spreading rapidly across America, some analysts had expected a rocky first quarter as the market reacts to the impact of the pandemic on the economy. Congress has agreed to a $900 billion stimulus package that should help ease the blow to businesses and provide cash to individuals and the unemployed. "I still think we have a higher market next year," said James Paulsen, chief investment strategist at Leuthold Group. He also expects a correction at some point. "They're difficult to call. ... I just thought with another big stimulus package coming, if there was some fear of a weak first quarter that goes out the window a little bit." Paulsen said the vaccine rollout should help the economy and the market. "That's like a put under the market," he said. Jonathan Golub, chief equity strategist at Credit Suisse, said the market might have been up 1% or 2% on the stimulus news, if not for the virus concerns. "In the next few months, there's a chance this thing is going to be much more problematic, especially as we're seeing hospital capacity is strained. The ability to manage the pickup in cases is challenging," he said. "The market is taking it pretty seriously, and I understand why." Golub said the market could take more hits from the virus. "You want to stay in high-quality stocks," until the vaccine is widely distributed, he said. Redler said the market has to hold the lows of Monday to continue its upward momentum. "Within the first half hour to hour, a lot of the weakness was absorbed," he said. "3,636 was today's [S & P] low. That will be the low we'll use as a barometer."

Traders work on the floor of the New York Stock Exchange.

NYSE

A resilient stock market shook off much of its losses Monday, signaling there's a good chance a Santa rally will lift the market higher into year-end.

The Dow Jones Industrial average closed up slightly, but it recovered about 450 points from its worse losses. The Dow ended the day at 30,216, up 37 points, while the S&P 500 was at 3,694, off 14 points or 0.4%. The Nasdaq was off 13 points to 12,742.

Stocks sold off sharply in early trading on news about more lockdowns in the U.K. because of a mutation of the virus there. Some analysts said the rebalancing of the S&P 500 on Friday afternoon, to include Tesla for Monday trading was also a factor, since index investors had to sell other S&P stocks to make room for the electric car maker.