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Why the Santa Rally Stumbled; QQQ Sets Up for Big Move, Be Careful

Next week could make or break the Santa rally.

The Fed meets on 12/12 and 13, and CPI and PPI are due out simultaneously. As a result, it wouldn’t a bad idea to review portfolios carefully, to consider taking some profits and to game out some potential ways to hedge. Still, the Nasdaq 100 Index (NDX) is forecasting a large, and potentially bullish move soon. Given the bullish seasonal trends, further upside is not out of the question.

This is especially notable given the recent liquidity scare and serendipitous recovery in the financial system, which I describe directly below. Let’s start by looking at the price chart for the Invesco QQQ Trust (QQQ).

Cutting to the chase, the Bollinger Bands are tightening around QQQ’s prices. That’s a sign, as I detailed here, that a big move is coming. Moreover, money flows, as indicated by Accumulation/Distribution (ADI) and On Balance Volume (OBV) are perking up. A move in QQQ above $394 would likely trigger a whole lot of algo trading programs queued up to trade breakouts.

Why the Santa Rally Stumbled Last Week

Stock traders who have profited from the October 2023 bottom should be thanking the bond market for their good fortune, which means that any major reversal in bond yields will likely be followed by what could be a major selloff in stocks. On the other hand, as can only happen in the strange world known as Wall Street, the recent rally in bonds nearly pulled the plug on the entire financial system on December 1.

In fact, the recent hiccup in the Santa Claus rally, from which the market has largely recovered, may have resulted from a reduction in the financial system’s liquidity brought about by, wait for it, the rally in bonds. According to reports, the speed with which the bond rally developed put a squeeze on Wall Street’s money lending machine (the repo market), whose money powder keg was squeezed by the Fed’s QT maneuvers, which led to the huge backup in bond yields.

The whole thing is so bizarre that it took me several reviews of multiple sources to put it together. But here is the simplified version. The Fed’s “higher for longer” mantra and its QT (removal of liquidity from the system), via the sale of treasury bonds, drained Wall Street’s piggy bank for borrowed money, leaving it with less funds than would normally be required further finance the rally in stocks and bonds.

Translation: we had a mini liquidity crisis as Wall Street ran out of money to lend for a couple of days. Stay with me, please. You just can’t make this stuff up.

When the U.S. Treasury Note yield (TNX) was rising to 5% (May to October 2023), spurred by the Fed’s QT and the panicked sellers who joined them in selling bonds, it squeezed the liquidity in the financial system. Thus, even though there was plenty of interest in buying stocks and bonds when sentiment turned, there wasn’t enough reserve money available in Wall Street’s loan machine to lend to hungry traders – the proverbial air pocket.

The visual evidence for the hiccup was the December 1, 2023 bump in the Secured Overnight Trading Rate (SOFR), which is best seen in the Zoom thumbnail to the right of the price chart.

As a result, those who got caught off guard and who ended up playing catchup after they missed the rally in stocks and bonds, which I predicted here way back in October, suddenly found themselves with limited supplies of money to borrow in order to trade the reversal. SOFR is back in sync with the Fed Funds rate now. But yeah, that was an interesting development for sure.

Bond Yields Pause, Mortgages Continue Bullish Decline

So where are we now? SOFR seems to be back in sync with the Fed Funds rate, which is why the stock market has resumed its rally. On the other hand, the U.S. Ten Year Note yield (TNX) has come a long way in a short period of time, which means we can expect it to back up some in the short term.

Indeed, a pause in TNX’s decline could last for the next couple of weeks as the CPI and PPI numbers are released and the Fed meets on December 12-13. Keep an eye on the 4.25-4.4% yield range, as any move above that key zone could trip some algo-selling in stocks and bonds.

Mortgage rates have dropped. A breach below 7% on the average mortgage could well take mortgages to 6.8%, where they will test the 50-day moving average for this series.

Consequently, homebuilder stocks, as in the SPDR S&P Homebuilders ETF (XHB), have broken out to new highs, spurred by the bullish beat of earnings expectations and outlook from Toll Brothers (TOL), which I own and recommended in October, 30% below the 12/2/23 closing price.

The long-term fundamentals of supply and demand remain in favor of the homebuilders and related sectors. For the next move in the homebuilders and other important market sectors, join the smart money at Joe Duarte in the Money FREE with a two-week trial subscription.

For more on homebuilder stocks and real estate stock analysis, click here.   

Interesting Emerging Sectors

Lately, I’ve focused on value investing, as I did in my recent Your Daily Five video, which you can catch here. As it happens, the trend seems to be expanding into sectors which are well off the radar for many investors. Comparing the action in the S&P 500 Citigroup Pure Growth Index (SPXPG) to the trend in the S&P 500 Citigroup Pure Growth Index (SPXPV) index, you can see the dynamic playing out.

One of the most unlikely areas of the market which has benefited from the value trend is the transport sector, where the difficulties being faced by trucking companies are gathering the headlines, but other subsectors are reaping the rewards.

You can see this in the action for the SPDR S&P Transportation ETF (XTN), which has quietly crossed above its 200-day moving average and which looks poised to make a run at its old highs near the high 80s, barring negative developments.

Market Breadth Recovers Post-Liquidity Squeeze

The NYSE Advance Decline line (NYAD) remains in bullish territory, trading above its 50- and 200-day moving averages. This may be slowed in the short-term, as the RSI indicator is nearing an overbought level. But even with a slower rate of climb than NYAD’s, the market’s breadth is holding up.

The Nasdaq 100 Index (NDX) is inching above 16,000. And with the Bollinger Bands starting to squeeze around prices, it looks as if a big move is just around the corner. Both ADI and OBV are flattening out as profit-taking increases.

The S&P 500 (SPX) remained above 4500 and looks poised to move above 4600. This is not surprising, as many value stocks continue to push SPX higher.

VIX Remains Below 20

The CBOE Volatility Index (VIX) remained below 20. This is bullish.

A rising VIX means traders are buying large volumes of put options. Rising put option volume from leads market makers to sell stock index futures, hedging their risk. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying. This causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit

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