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Over the last 10 trading days, the world's most important benchmark index has been trading in a narrow 1.4% range, with no wins or losses exceeding 0.6%. On Wednesday, for instance, the S&P 500 (^GSPC) finished down 0.38%.
Historically, volatility tends to contract at the end of December, paving the way for predictable year-end gains. But this year, November's gangbuster returns may have brought forward an early Christmas for investors.
Stocks have had three principle catalysts over the last two years — inflation, jobs, and the Federal Reserve — and all three are on the docket over the next week. Whether bullish or bearish, markets could get quite interesting in what is normally a sleepy time of year.
Friday, investors will get November employment figures from the BLS — a report that has added 4.67 percentage points of the S&P 500's 18% return year to date. That contrasts with a loss of 5.46 percentage points in 2022 — a year spent mostly in bear market territory.
The S&P 500 has ended Jobs Day Fridays in the green 60% of the time this year with an average win of 0.47 percentage points. Last year, 3 out of 4 Jobs Days were losers, with an average loss of 0.46 percentage points.
Moving ahead to Tuesday, the BLS releases the Consumer Price Index (CPI) and related inflation metrics for November. This year, investors have been rewarded an average of 0.45 percentage points per report — nearly 5.0 percentage points if you add all of them up — with a 73% win rate. That's also a flip from last year, when investors lost a total of 0.72 percentage points and ended red 58% of the time.
A day later, next Wednesday, Jerome Powell takes the podium at the Fed, as the Federal Open Market Committee releases its final interest rate decision of the year.
Investors might be surprised to learn that last year stocks gained 4.14 percentage points on Fed days, despite only winning 50% of the time. In 2023, investors have lost an average of 0.15 percentage points per Fed day for a total loss in 2023 of 1.05 percentage points, with a 57% win rate.
With the drop in volatility ahead of these key reports, markets are primed to make a strong directional move. The direction in 2023 has been strongly up for most of the year. But bond market volatility is on the rise, as is the US dollar — both of which act as headwinds for stocks.
Shorts are loading up as all the major indexes — plus the Russell 2000 — are sitting just under strong potential historical resistance. If stocks crack because of a narrative-changing report or announcement, watch out, as liquidity is low and downside moves can get exacerbated.
But if these reports end up bullish, the bears simply become fuel for a short-covering rally that could take the S&P 500 to a fresh record high by year-end or early 2024.
Short-term traders might watch for a potential bear trap if the S&P 500 trades down to 4,500. A head fake lower before ripping higher would be a fitting year-end surprise for the bulls.
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