Weekly Trader's Outlook

Is a Santa Claus Rally in the Cards This Year?

December 1, 2023 Nathan Peterson
Stocks are starting the month of December on a high note as 10-year yields fall to two-month lows.

The Week That Was:

As of midday Friday, the S&P 500 is up roughly 0.5% on the week, which tells me that broadly this has been a week of bullish consolidation following November's strong rally (SPX +8.9% for the month). While it may be a little early to call, what stands out to me over the past two days is the relative underperformance in technology and relative outperformance in the small caps. For example, at midday today the Nasdaq Composite (the best-performing major index YTD) is up the least (+0.56%) among the majors while the Russell 2000 (the worst-performing major index YTD) is up the most (+2.44%). We also saw relative weakness in the Nasdaq vs. the other majors yesterday, which has been an unusual occurrence during November's rally. This could be an early sign of a rotation toward small caps or value, which perhaps is driven by the assumption that more alpha (relative gains) will come from beaten-down names. Like I said, it's too early to call but I think this could be a noteworthy development if it persists. Perhaps the investor reasoning that is behind the recent divergence is this: If rates are on a downward trajectory and the economy looks poised to achieve a soft landing, shouldn't the beaten-down small caps stand to outperform in a "catch-up" trade? The counter perspective to this would be that small caps have been underperforming for a reason and represent a value trap. Only time will tell.

Outlook for Next Week:

Stocks are near the highs of the day at the time of this writing (1:15 PM ET) as 10-year yields are dropping down to fresh two-month lows (4.22%). The catalyst for the drop in yields appears to be some late-morning commentary from Federal Reserve Chair Jerome Powell, even though he didn't seem to convey any new information. Powell said that it's too early to conclude that policy is where it needs to be in order to achieve their objectives, but investors appeared to focus on his statement that monetary policy is "well into restrictive territory." Regardless, the SPX, DJI & RUT are currently all on track to close at multi-month highs. On the one hand, the SPX is hovering below resistance at 4,600, and whether it can break above this level next week remains to be seen. On the other hand, the DJI broke out to a 52-week high yesterday (and is adding to gains today), the RUT is coming to life today and at two-month highs, and 10-year yields are dropping to fresh two-month lows. Taking everything into consideration, including bullish seasonality, and it feels like the path of least resistance is higher next week. Therefore, my outlook for next week is "Bullish." My only questions surrounding my outlook for next week are: a) If SPX fails to break 4,600 does that dampen bullish momentum in the RUT/DJI, and b) What happens if next Friday's Nonfarm Payrolls come in strong? Last month stocks responded positively to a weak Nonfarm Payrolls report (150K vs. 160K est, Unemployment rate rose to 3.9%), so I'm assuming investors want to see a number below estimates (otherwise stated, continued evidence of slack developing in the labor market).

Next Week's Potential Market-moving Catalysts:


  • Tuesday (12/5): JOLTS – Job Openings 
  • Wednesday (12/6): ADP Employment Change
  • Thursday (12/7): Initial Jobless Claims
  • Friday (12/8): Nonfarm Payrolls, Average Hourly Earnings, Unemployment Rate, University of Michigan Consumer Sentiment (Preliminary)  


  • Monday (12/5): Gitlab (GTLB)
  • Tuesday (12/6): AutoZone (AZO), Signet Jewelers (SIG), MongoDB (MDB), Toll Brothers (TOL)
  • Wednesday (12/7): Campbell Soup (CPB), Chewy (CHWY), Veeva Systems (VEEV), C3 AI (AI)
  • Thursday (12/8): Dollar General (DG), Ciena (CIEN), Broadcom (AVG)), Lululemon (LULU), DocuSign (DOCU)


Economic Data, Rates & the Fed:

Likely the most important economic data point for the markets this week was the Personal Consumption Expenditures (PCE) Price Index report for October. PCE prices were unchanged month-over-month (vs. expectations for a 0.1% rise) while Core PCE prices increased 0.2% month-over-month (in line with the +0.2% estimate). On a year-over-year basis PCE prices decelerated to +3.0% from +3.4% in the prior month, which represents the lowest level since February 2021. Core PCE prices on a year-over-year slowed to +3.5% from +3.7% in September, which is the lowest level since the spring of 2021. The decelerating inflation data was largely helped by a decline in energy prices and appears to be reinforcing the bull thesis that inflation is on its way down (eventually) to the Fed's annual 2.0% target.

Also helping bolster the bull thesis this week was some relatively dovish commentary from Fed Governor Christopher Waller on Tuesday. Waller acknowledged that inflation is still too high and that it is still unclear whether the recent economic slowing will be sustained but added that he is "increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%." On the flipside however, that same day Fed Governor Michelle Bowman reiterated her belief that more rate hikes will likely be needed to counter elevated inflationary forces. The next Federal Open Market Committee (FOMC) meeting takes place on December 12-13th.

Yields on the 10-year Treasury appeared to respond to Waller rather than Bowman's comments this week. Last Friday the 10-year yield was 4.472% and at the time of this writing it is down to 4.286%. The 10-year yield is hovering around two-month lows and has been in a firm downtrend for the month of November, which was sparked by the soft October Nonfarm Payrolls report on Nov. 3rd. Next Friday we'll get the November Nonfarm Payrolls report which will likely generate some yield volatility.

According to Bloomberg, the probability of a Fed rate cut at either the December or January FOMC meeting currently stands at 9.2%, versus a 12.8% probability for a rate hike as of last Friday. I present the week-over-week change in probabilities because it helps to interpret how the market is interpreting the economic data and any Fed speak that occurs. Looking further out in time, Bloomberg probabilities suggest a probable rate cut at the May FOMC meeting in 2024 (using >65% probability as the threshold).

Technical Take:

S&P 500 (SPX + 18 to 4,586)

As previously mentioned, the SPX is up modestly this week and registered an impressive 8.9% gain for the month of November. Are we near-term overbought? If you use the Relative Strength Index (RSI) as a measure, you could say that the current read of 73 is a little hot. However, the last time the SPX was rallying towards the resistance level of 4,600 back in late July, a negative divergence showed up on the RSI. This time, today's higher price level in the SPX is being accompanied by a higher read on the RSI, so no orange flags yet. Remember that being overbought on the RSI is not a sell indicator, it just gives you a sense of the momentum that has been underway. We got within 13 points of 4,600 on an intraday basis on Wednesday but subsequently reversed course, followed by a recovery yesterday. Now it looks like the SPX is set to make another run at this resistance level either later today or next week. If the SPX can push above 4,600 this may add fuel to the recent bullish momentum. If not, then we may need to chop in a sideways trend for a while before (potentially) making another push. Near-term technical translation: bullish if SPX breaks above 4,600, neutral to slightly lower if not.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Russell-2000 (RUT + 44 to 1,853)

The technical snapshot on Russell is more bullish relative to the SPX. You might recall in my last blog (November 17th) I highlighted a potential (bullish) head and shoulders bottom on the RUT and the index has continued to push higher following the break of the neckline on November 14th (the day the October's soft CPI report was released). As I mentioned in the intro above, it's too early to confirm that a rotation into small caps is underway, but the RUT is up ~11.5% since November started and is flexing some relative strength today. Near-term technical translation: bullish

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Market Breadth:

Below is a Bloomberg chart showing the % of members on the S&P 500 (white line – 61.24%), Nasdaq Composite (blue line – 36.29%) and Russell 2000 (red line - 43.21%) that are trading above the 200-day SMA. As you can see on the right side of the chart, we are essentially at the highest levels since August for all three of these indices. Its important to note the positive trend over the past month as this signals a broadening of the recent rally (vs. concentrated leadership from the "Magnificent 7"), which helps support the bullish thesis for stocks.

Source: Bloomberg L.P.

Market breadth attempts to capture individual stock participation within an overall index, which can help convey underlying strength or weakness of a move or trend. Typically, broader participation suggests healthy investor sentiment and supportive technicals. There are many data points to help convey market breadth, such as advancing vs. declining issues, % of stocks within an index that are above or below a longer-term moving average or new highs vs. new lows.

This Week's Notable 52-week Highs (124 today): Adobe Systems Inc. (ADBE - $4.49 to $606.52), Affirm Holdings Inc. (AFRM + $1.65 to $36.06), Coinbase Global Inc. (COIN + $6.08 to $130.80), CrowdStrike Inc. (CRWD - $5.47 to $231.55), International Business Machines Inc. (IBM + $1.00 to $159.56), Microsoft Corp. (MSFT - $5.97 to $372.94), Visa Inc. (V - $1.21 to $255.46)

This Week's Notable 52-week Lows (59 today): Alibaba Holdings Inc. (BABA - $2.08 to $72.80), Bilibili Inc. (BILI - $0.11 to $11.21), Franco-Nevada Corp. (FNV + $1.24 to $113.34), Hormel Foods Inc. (HRL + $0.23 to $30.82), Staar Surgical Company (STAA + $1.01 to $32.37), Marriot Vacations Worldwide Inc. (VAC + $4.17 to $77.07), Walgreens Boots Alliance Inc. (WBA + $0.29 to $20.23)

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