A recent favorable report of a cooling in the annual Consumer Price Index to 7.7% sent stocks soaring, with the 14th biggest one-day gain in the Nasdaq Index’s 51-year history, recalls Jim Stack, money manager, market historian and editor of InvesTech Research.

However, lost in all the hoopla and celebration was the fact that at the close the Nasdaq was still down -29% since the start of the year. And what would be more surprising to most investors is that of the 13 bigger daily gains, all but one occurred in ongoing bear markets!

In fact, 16 of the 20 previous largest daily gains in the Nasdaq Index occurred during bear markets, suggesting an 80% probability that we are still in a bear market. Of course, we should also point out that two of those four bullish exceptions — March 24, 2020 and March 10, 2009 — did coincide with the start of a new multi-year bull market.

The risks in this market remain at extreme levels, despite the tendency of battle-weary investors to view any sign of a reprieve in inflation pressures as a potential market bottom. Another factor likely playing into the recent optimism is the typical seasonal strength that often emerges around this time of year.

We are now entering a period where the equity market typically brings good cheer to investors and traders alike. Historically, stocks tend to perform well between November and January, with the period around year end known as the “Santa Claus Rally” being particularly strong. Even so, we must note an important caveat to this trend.

When the S&P 500 is down at least -15% for the year through October, as it is this year, the poor prevailing market conditions can override the typically positive seasonal trend.

As shown in the graph below, these negative years have an average return of -5.6% between November and January versus an average of +5.0% for all years. There is no guarantee that returns will be similarly bad this time around, but there are reasons to believe that Santa may not be coming down the chimney this year.


While there is truth to the Santa Claus Rally in an ordinary year, it tends to be challenged when there are greater So, despite the near-term optimism, risk remains high and portfolio defenses are still necessary. As a result, we will continue to steer a defensive course.

With every recession comes a unique and profitable buying opportunity. One challenge, as we’ve repeatedly 50 said, is to have the patience and discipline to wait for that opportunity.

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