A One Day Santa Rally Ended 2021 On Strong Note – The Market Breadth

Stock Market Commentary

The rebound from oversold conditions leading into Christmas provided just enough fuel for a one day Santa Claus rally. After the week started with a rush for Santa, the excitement fizzled like kids opening their last Christmas gifts. Still, the rally was enough and ended 2021 on a strong note. The S&P 500 (SPY) held onto its latest breakout. The NASDAQ (COMPQX) held support at its 50-day moving average (DMA). The iShares Russell 2000 ETF (IWM) stuck by its overhead 200DMA resistance. The gains for the year for all three indices were quite strong.

The Stock Market Indices

The S&P 500 (SPY) shot out of the one day oversold period like an express train to the North Pole. The scramble to buy was quite the contrast to the variety of worries and negative catalysts that escorted the stock market toward and to oversold trading conditions twice in December. Even after the rally fizzled out, the S&P 500 remained tall. The index ended 2021 just a hair off its all-time high and adorned with a 27% gain over the close of 2020.

The S&P 500 (SPY) broke out above its 50DMA and likely brought the bearish cycle to an end.
The S&P 500 (SPY) enjoyed a remarkable year of relatively consistent support from its 50DMA on the way to a 27% gain for the year.

The NASDAQ (COMPQX) confirmed its 50DMA breakout. However, the tech-laden index fell far short of its all-time high set in November. The NASDAQ also reversed its entire gain from Monday and ended the week hovering just above 50DMA support. Still, a 21.4% gain ended 2021 with the NASDAQ in a strong winner’s column.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) only came close to its 200DMA once on its way to a 21.4% gain for the year.

The iShares Russell 2000 ETF (IWM) chopped and churned the most last week. IWM gave up almost all its Monday gains on the very next day. The index of small caps proceeded to swing around in a tight range right under its 200DMA resistance.

All of IWM’s gains for the year came in the first 5 weeks of trading. IWM flailed around in a trading range from there with one false breakout in November. IWM ended 2021 with a 13% gain.

The iShares Russell 2000 ETF (IWM) failed to break away from its near year-long trading range and finished with a 13% gain for the year.


Stock Market Volatility

The volatility index (VIX) ended 2021 poetically with a major fade from its second highest surge of 2021. Faders consistently pounded the VIX under 20 after February. The “fear gauge” spent the majority of 2021 in the 15-20 range. Interestingly, the stock market was able to remain in bullish mode without dropping back down to the old 15.35 pivot. The volatile start to 2021 certainly said little about the bullish year to come.

A rounded bottom for the volatility index (VIX) could be setting up a major surge in the coming weeks.
The volatility index (VIX) provided bouts of excitement but the faders always won out. The VIX spent most of the year below the critical 20 level and above the old 15.35 pivot.

The Short-Term Trading Call After Santa Ended 2021 Strong

  • AT50 (MMFI) = 41.9% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) 45.8% of stocks are trading above their respective 200-day moving averages
  • Short-term Trading Call: bullish

AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, ended 2021 at 41.9%. My favorite technical indicator sprinted from oversold conditions to make highs for the month. The new all-time high on the S&P 500 suggests a new bullish phase is underway. However, this phase awaits confirmation from the NASDAQ. If the NASDAQ fails to hold 50DMA support and punches below its 20DMA, I will downgrade my short-term trading call to cautiously bullish. In Seeking Alpha, I explained how the S&P 500’s significant divergence from market breadth is a potential warning sign for 2022. Unless the Federal Reserve capitulates on its monetary tightening, I expect 2022 to be a more “normal” year of pullbacks and oversold episodes.

Otherwise, HAPPY NEW YEAR! 🙂

AT50 (MMFI), the percentage of stocks closing above their respective 50DMAs, spent most of the year under pressure but only dipped into official oversold territory once.
AT200 (MMTH), the percentage of stocks closing above their respective 200DMAs, spent the entire year locked into a downtrend without even a single higher high.

Be careful out there!

Footnotes

“Above the 50” (AT50) uses the percentage of stocks trading above their respective 50-day moving averages (DMAs) to measure breadth in the stock market. Breadth defines the distribution of participation in a rally or sell-off. As a result, AT50 identifies extremes in market sentiment that are likely to reverse. Above the 50 is my alternative name for “MMFI” which is a symbol TradingView.com and other chart vendors use for this breadth indicator. Learn more about AT50 on my Market Breadth Resource Page. AT200, or MMTH, measures the percentage of stocks trading above their respective 200DMAs.

Active AT50 (MMFI) periods: Day #431 over 20%, Day #7 over 30%, Day #5 over 40% (overperiod), Day #29 under 50%, Day #31 under 60%, Day #211 under 70%

Source for charts unless otherwise noted: TradingView.com

Full disclosure: no positions

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*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close.

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