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Santa’s rally is coming up, but will the markets correct sooner?

In recent days, the markets have decided to take a break, at least that is how we see it in Europe, some North American indices and even in cryptocurrencies. Reasons? Gain momentum ….

Meanwhile, investors are “making their list and going through it a couple of times.” Prices remain close to all-time highs, but Fed remains accommodative (at least for now and until Powell decides), while the Profits they still are “juicy“and the market believes that the risks related to the pandemic have been largely discounted. However, the rallies are present again and the risk of new confinements flies in the air, as much as the punishment that the lines received last week. air travel and everything related to travel.Also, if inflation data surprises to the upside again, the rally party may be spoiled.

Yes, inflation is “naughty”, and although some remain convinced that it will be transitory and better at the end of 2022Recent data have made some bet on non-transience. Furthermore, companies appear to be able to pass the costs on to consumers, at least for now. Hopes are high that profit margins will remain strong and profits will eventually catch up with valuations.

Meanwhile, investors’ “wish lists” hang by the fireplace, hoping that the “Santa Claus rally” will soon arrive. And as shown in the following graph, seasonality in the last 34 years shows that the happy Christmas rally has occurred in most cases, although it is also observed that there is a slight contraction in late November and early December, with the exception of 2012, 2014, 2015 and 2018 with important corrections and mostly higher than 10%.

As pointed out in yesterday’s note “If companies increase their dividend policy..”, In these two months it is the season in which investment funds distribute their capital gains, dividends and interest income for this 2021, with what exists a potentially negative impact on the market, particularly when volumes decline or liquidity drops, thus magnifying the impact. And as some charts of certain indices point out, the volume has been down since mid-October.

Does this mean that the Santa rally and the previous correction will certainly pass?

Not necessarily, since many times the market does the opposite of what you would expect. However, there is a high probability that given the weak volumes, any additional selling pressure could put pressure on prices in the short term, and is a risk worth considering if the investor is looking for a better entry point. .

But the good news is that when Santa comes, the effect of Christmas can last until January, although clearly without guarantees but with historical probabilities that help in that wish list that some already make for the Magi.

Therefore, to wait for that rally with Santa ….. unless the recent rebounds of the pandemic in some countries generated uncertainty among investors …

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