November lived up to its reputation as a seasonally strong month, with the S&P 500 sporting double-digit percentage gains and the small-cap Russell 2000 index soaring 20 per cent – its best month ever, according to Bespoke Investment.
Historically, December has been stocks’ strongest month, so can indices stick to the seasonal script as 2020 draws to a close?
It’s certainly possible. This is a bull market, stocks tend to enjoy outsized gains at this time of year, and Covid-19 vaccines are coming, so it’s little surprise that investors are bullish.
The problem is they may be too bullish. CNN's Fear and Greed index, a composite sentiment tool tracking multiple indicators, hit 92 last week – well into "extreme greed" territory. Short-selling is at its lowest level since at least 2004, according to Goldman Sachs. Technically, indices are extended; 91 per cent of S&P 500 stocks last week traded above their 200-day moving average, a level that tends to be followed by "mixed" near-term results, according to technical analyst Jonathan Krinsky.
The good news, says Krinsky, is any pullback is unlikely to be decisive, with none of the previous episodes marking a “meaningful market top”.
