The stars are aligned for a year-end rally that lifts major indices into modest but positive gains, rewarding market players who have suffered through the deepest correction since 2015. Even underperforming sectors that include small caps and semiconductors should finally awaken from their long slumbers, retracing major portions of double-digit percentage declines while giving a boost to beaten-down portfolios.
Ironically, neither this week's election results nor renewed bullishness is likely to drive buying pressure from now into year end. Rather, Wall Street greed and the hunt for annual performance by the world's biggest fund managers should now move to the top of the market's agenda and is unlikely to be dissuaded by rising yields, China tariffs or the rest of 2018's critical economic issues.
Traders and investors wanting to get in on the action should focus their strategies on the period between November options expiration, starting next Monday, and Dec. 21's triple witching finale. The last date marks the true end of the 2018 market because that's when fund managers will lock in performance numbers through options plays and head out for winter holidays with husbands, wives and/or lovers.
Key retracement levels on major sector funds should identify the most advantageous prices to take profits in December. Big tech is best positioned to benefit from this annual window dressing exercise, with the Invesco QQQ Trust (QQQ) trading relatively higher in its 2018 range than blue-chip or small-cap funds. This period should also signal tradable lows in some or all of the FAANG stocks, at least into the first quarter of 2019.
The big tech fund could easily reach the .786 Fibonacci retracement level above $180 prior to year end. The unfilled Oct. 4 gap near $185 and the 100% retracement at $187.50 could offer more ambitious targets if upside momentum increases into mid-December. However, the year-end rally may need to wait until the fund fills the Oct. 31 rally gap between $165.50 and $168.50, perhaps in a sell-the-news reaction to the now-split U.S. Congress.
The SPDR S&P 500 ETF (SPY) reversed on Oct. 29, completing the fifth point of a broad rising channel that will affect price action well into 2019. The small double top breakdown on Oct. 10 has aligned with the .786 retracement, making $286 an attractive price to take profits. The fund also has an Oct. 31 gap to fill, suggesting that a post-election decline into $267 would offer a buying opportunity. More conservative market players may wish to wait for a rally above the 50% retracement level because that buying spike would also mount the 200-day exponential moving average (EMA).
The iShares Russell 2000 ETF (IWM) should post gains in coming weeks, but the rally's strength or weakness remains a wild card due to seasonality, which will strongly favor small caps at the start of January 2019. Market players often get a head start on this bullish influence, buying stronger components in November and December. The fund has the potential to outperform both big tech and blue chips if that happens.
Key Russell resistance is centered at the 50% retracement level near $159, narrowly aligned with the 50- and 200-day EMAs. Fortunately, the tiny Oct. 31 gap is insignificant, raising the odds that small caps will take the leadership mantle as early as this week. Resistance could dissolve quickly if that happens, opening the door to the .786 retracement level at $167, or about 13 points above Tuesday's close.
The Bottom Line
The market should enter a broad-based recovery in the coming weeks, driven by Wall Street insiders tidying up portfolios and chasing year-end performance bonuses.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>