Market Briefing: Assessing the Santa Claus Rally Amid December Weakness

Dear MyCompass Friends:

 The U.S. stock market entered the final full week of December with the S&P 500 showing a monthly loss, raising questions about whether the traditional “Santa Claus rally” will occur. Historically, this 7‑trading‑day window, the last 5 days of December and first 2 days of January, has delivered positive returns 77% of the time since 1950. Analysts argue that despite recent softness, conditions remain supportive for a year‑end rally.

Key Drivers 

• Historical Strength: Weak early‑December performance has rarely derailed the Santa rally. In 20 of 26 years when early December was negative, the S&P 500 still rose during the Santa period. 
• Macro Tailwinds: Cooling inflation and slower job growth may give the Federal Reserve room to cut rates in 2026, improving risk appetite. 
• Market Breadth: Gains have broadened beyond Big Tech. Banks, small caps, industrials, materials, and consumer‑discretionary stocks have outperformed, signaling healthier market participation. 
• Technical Setup: Recent pullbacks appear normal and have held key support levels, which analysts view as constructive. 

Risks & Caveats 

• AI Valuation Concerns: Heavy capital spending tied to AI infrastructure has inflated valuations. If spending slows or projects are canceled, it could pressure markets. 
• Notable Warning Sign: Blue Owl Capital reportedly withdrew from a major Oracle data‑center project due to debt and AI‑spending concerns, raising questions about sustainability of AI‑related investment. 

Outlook 

Analysts remain cautiously optimistic. Historical patterns, improving breadth, and macro conditions support the likelihood of a Santa Claus rally and potentially new highs. However, elevated AI valuations and capital‑spending risks warrant close monitoring. 

Key Takeaway: The setup favors a year‑end rally, but there should be a balance exposure to AI leaders with beneficiaries of broadening market participation, such as financials, industrials, and small caps. 

This week trading is a shortened week (the U.S stock markets closed at 1pm Dec 24 and Dec 25) for Christmas Holidays. Monday & Tuesday may be busy, but Wednesday & Friday may be light. Join our Trading room for daily alerts and ideas along with market projections. See you then. Happy Holidays!!!

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