On the Eve of Thanksgiving holiday, the Trump administration announced the signage of the much waited Pro-Hong Kong bills.  Because Thanksgiving is such an important national holiday, many market participants were away from the market, the market reaction to the news has been muted.  It has been observed that any trade related bad news were delivered at the market peaks and vise versa, the good news were always delivered at the market bottoms.  China has not announced any retaliation measures yet, although promised to do so.  It is commonly agreed that the Pro-Hong Kong bills are not helpful to the negotiations of the phase one deal.

Seasonally, December is the best performing month of the year.  The Santa Claus rally typically starts from mid-December low and lasts through the end of January.

Is this Santa Claus rally safe this year?

On December 15th, the administration will be forced to make a decision on another batch of tariffs.  It is extremely difficult to forecast what the December 15th tariffs decision will be, but we could find clues from the price actions.

Plan A: if there is no addition of new tariffs, the market will sell the news anyway, but the downside is limited.

Plan B: if there is addition of new tariffs, the market will sell the news hard, if it exceeds more than 5% selloff, then we could be facing a mini bear market which may not bottom until Q3 2020.

So we will be observing how the market trades from now until December 15th.  Currently the S&P 500 is 23.61% over the 200-week moving average, which is higher than the May and July 2019 tops.  The fundamentals have not changed much from May to November, except the monetary policy and the still pending trade deal.  The major reasons for the rally have been the easy money policy and anticipation of a trade deal.

Besides the pending decision on December 15th, we do have concerns about the market in general even though it seemed invincible since the early October low.

1. China large cap FXI topped in April 2019 and it has been under performing the US by a large margin since then.  After the worldwide equities peak in January 2018, FXI started to decouple from SPY in June 2018.  Eventually, SPY was sold off to make a bottom with FXI in December 2018.  The US equities market is not living in isolation, we suspect eventually it will meet FXI at the bottom sometime in the future.

2.  The 10-year treasury yield is not rallying with the stock market.  Somehow the bond market doesn’t believe there is a phase one deal or strong growth ahead.

3.  Growth stocks are under performing.  Ticker VEEV is a best in class SaaS growth stock, beat top and bottom lines on November 26th.  It had upgrades from all major brokerage houses before the market opened on November 27th.  It was promptly sold off 20 points at open on Wednesday before Thanksgiving holiday.  Richly valued growth stocks such as VEEV ( 60x forward earnings and 23 price/sale) typically are victims of recession fears and winners of slow growth environment.  Not only VEEV behaves this way, many other can’t do no wrong growth stocks such as WDAY, SHOP and TTD have been under performing SPY since August peak.

With the concerns we have about the general market, we have been liquidating our long positions considering the S&P 500 is pretty close to its yearly level 2 resistance at 3192.44.

It really doesn’t pay to chase the market at such lofty levels, especially the rally has been based on the hopes of a phase one trade deal.

For sure, this December 2018 bottom is not like the February 2016 bottom which started an amazing globally synchronized rally from February 2016 to January 2018.

We are some time away from a global stock market bottom.  For time being, value trumps growth.