Dow Jones Recovered Over 1,000 Points After Worst Post-X’mas Trading; Biggest Gain In 10 Years

On December 26, 2018, the U.S. stock market had its largest point-gain of all time as equities soared upwards. The Dow Jones recovered over 1,000 points during post-Christmas trading: its biggest gain in 10 years. This miraculous recovery was a welcome relief for many after having to deal with massive losses earlier in the month. The Dow Jones, the Nasdaq, the Russell 2,000, and the S&P 500 index all experienced substantial gains of at least five percent.

What Caused the Rally?

Many financial analysts speculated that the news of Fed chairman Jerome Powell no longer having to worry about losing his position helped to bolster the massive rally. Others have speculated that it was a short squeeze with many who held short positions deciding to take their profits. In reality, it was probably both of these factors and more, so let’s take a look at the details.

Leading the Stock Market Rally

Finance, health care, and tech led the way as the bulls drove the rally. Another big winner was the retail sector, which had experienced an amazing shopping season filled with lots of sales. This part of the bull run was led by Amazon stock, which had its best performing day in over a year.

The Effect of the Energy Market on the Stock Market Rally

However, don’t forget about oil. This is an enormously important factor that should be considered when speculating about what might have driven the upsurge. U.S. crude experienced its largest daily gain in over two years and led the way for a 6.2 percent increase in the energy sector.

Bad News for the Bears

With this tremendous upswing, the struggling S&P 500 was rescued from entering the dreaded bear market zone, which is defined as a 20 percent loss or greater from a high point. If this price jump would not have occurred, then the greatest running bull market of all time would have died a tragic death.

Unemployment and Inflation

There are a lot of signs that this amazing recovery will lead into a year of even more growth and prosperity. Unemployment is low, coming in 3.7 percent, which is the lowest that it’s been since the late sixties. Also, this last holiday season was blessed with additional consumer spending.

It is also important to realize that inflation is under control. This will enable the Fed to keep rates low so that the economy can continue to flourish at a healthy pace.

Pay Growth and the Government Shutdown

Another positive for the stock markets is that pay growth has increased, and this is very positive for many of the stocks in the Dow Jones and the S&P 500.

The government shutdown in the U.S. will probably not affect the markets in any way. Even though the latest report on gross domestic product may not be released on time, this should not have any major impact on the markets.

Will the Rally Continue Into 2019?

Since the rally on December 26, the S&P 500 has increased from 2362.74 into a comfortable range just over the 2,550 level, creating a 200+ point jump that appears to be sustainable. The Dow Jones has risen from 21,792.199 to a level just above 21,600 mark that also appears to have the ability to carry forward into the upcoming weeks and months.

Bearish Signs

However, despite these bullish indicators, a fairly large percentage of analysts and professionals are predicting a bear market for the rest of the year. In fact, many have stated that the post-Christmas rally was nothing more than a bear market rally. There are few who are saying that the end of the year recovery was the beginning of a new bullish cycle.

In mid-January, corporations will begin reporting fourth quarter results, and although they are probably going to be higher than the same period the year before, they are predicted to be lower than initially expected. This may affect the prices of certain stocks if earnings are not as good as they were speculated to be.

Another bearish indicator is that the end of many bull markets are plagued with massive volatility. If this is true, then the stock market might be in for a bumpy ride throughout the rest of the year.

According to several recent surveys, it looks like a substantial percentage of both investors and analysts are preparing for lower prices during the rest of the year and going into next year. This is why many professionals are now suggesting that investors may want to consider placing a larger percentage of their portfolios into bonds. There are other specialists suggesting precious metals as another option.

Indicators for the Bulls

However, there are a few more bullish things to consider. One of them being that the U.S. and China might agree on a trade deal, and this will bolster the economies of both nations. It appears that both sides may be willing to make concessions, and if this happens, both nations would be able to claim at least some limited form of victory.

Several speculations are now suggesting that although the economy is expected to weaken, it will not enter a bear market. If this happens, then the bulls might not get the market they want, but at least they won’t be completely blindsided.

Enormous Equity Outflows

One of the biggest pieces of data that supports the current bear market mentality is that in December 2018, large equity outflows occurred. This is truly a bearish indicator and a valid warning that equities may not be returning to their 2018 highs anytime soon.

This type of action would suggest that many investors are losing confidence in the stock markets and seeking other alternatives for capital investment. This does not bode well for the S&P 500, the Nasdaq, or the Dow Jones.

Conclusion

So with the large amount of bearish sentiment and indicators now present in the stock market, it might be prudent to be a little more cautious than usual because your attempts at bargain hunting in this highly volatile environment could lead you into the dreaded territory of “trying to catch a falling knife,” if you buy a stock, and its price drops even more.

So remember to do as much research as possible before making any critical decisions. You may be able to find some really good bargains right now, but remember that the worst may not be over.