The Fed will soon meet to announce the tapering of the $120 billion per month asset-buying program during the FOMC meeting on Wednesday, November 3rd. Chairman Powell may also signal the first-rate hike beginning in Summer 2022. However, several developments can lead to the seasonal rally that can ignite the elusive but explosive stock market melt-up.
First, the S&P 500 Index (SPX – 4,613.67) has appreciated 857.60 points or 22.83% so far this year. Many fund managers underperforming or underinvested in the stock market may be forced to increase equity exposure as the rally continues. As professional investors chase returns to prevent underperforming their benchmark, this bodes well for the stocks to advance, at a rapid pace if the fund managers all buy at the same time.
Second, the stock market has shaken off the spooky trading patterns of September and October and now moving into the favorable seasonality period from November to January. The yearly trading seasonality phenomenon, commonly referred to as the Santa Claus rally gives the stocks a bullish tailwind into the end of the year and the New Year.
Third, the following may be potential catalysts to send stocks soaring into year-end: falling Covid-19 cases, broader vaccination of the young, the impending passage of the $1.85 trillion-dollar economic and environmental package, anticipation of a fourth stimulus check, the booming housing market, low global interest rates, and robust consumer spending.
Four, like a dry tinder box, any of the above can provide the spark to ignite a momentum-based rally into year-end and early-2022. It is technically significant that the impending year-end rally is broad-based as this confirms the expanding breadth.
Many of the US stock market indexes, including SPX, INDU, NYA, COMPQ, and NDX, have completed technical breakouts resulting in new all-time highs. The Small-cap 600 Index (SML) is within striking distance of its 6/9/21 record high of 1,417.45. The iShares Microcap ETF (IWC) is also shy of breaking out.
The above bullish catalysts may force money managers and professional traders to turn toward momentum, mid-caps, small-caps, micro-caps, and deep value stocks to keep up with an accelerating trend.
The small-cap market may generate the highest upside potential under a stock market melt-up. An SML breakout above 1,417.45 suggests +166.93 points or an SML target at 1,584 or gains of 11.84% from today’s close of 1,410.24. The potential SML return is three times the projected 4.32% return based on the recent SPX 2-month breakout target of 4,812.76. The SML gain would also exceed the 9.6% return on SPX based on the accelerated channel breakout (above 4,706) target at 4,991-5,057.
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