Weekly Market Outlook: Navigating the Year-End Surge and Assessing Potential Risks

Markets are coming off a historic month of November and looking to finish the year strong. We have been calling for new all time highs in the stock market since late September. Here we are in the first week of December and the NIFTY (Indian stock market) is making new all time highs, while the DAX (German stock market) is just half a percent away from making new all time highs. These are the 5th and 3rd largest economies in the world respectively, and US indices are not far behind.

The Dow is less than two percent away while the NASDAQ and S&P500 are both less than five percent away from all time highs. However, November was a near record setting month and sentiment is starting to lean into extreme greed. Normally, we can use that as a sign of caution but I believe we are in an environment where things will get very stretched before they revert back to the mean. We saw similar action and emotions back in August to October where the correction in stocks went deeper and longer than anticipated. Now we are seeing the flip side of that as bears and sidelined investors keep waiting for a correction.

I don’t believe the market is going to be very generous to those that have been sidelined. I also don’t thing the ride will be so straightforward for the bulls. The market is very strong in a positive trend so its not one you want to sell or short, but at the same time the bulls may be getting overly aggressive anticipating more upside.

While I maintain that any dips will be shallow and short lived I think the worst case for both camps would be a sideways and choppy market for a week or two. This way people waiting in cash don’t get the entry they want and the daily/weekly call buyers get burned on time capitulation. The data and seasonality would suggest this is a likely scenario. We saw a similar setup a year ago coming off a big November everyone wants it to continue then, the first half of the month is rough and investors get chopped up before the post Christmas Santa Clause rally takes us into a very strong January.