The Christmas Ramp continues as stocks remain firmly bid even going into this weekend’s monetary event risk in China. There’s a whiff of panic as under allocated investors watch the markets runaway and refuse to correct (see chart below).
The economic data has reversed from being a headwind and is now a tailwind. The bond market safe haven is safe no more. There is a growing perception that the U.S. is the place to be in 2011 as emerging markets are at the early stages of a tightening cycle with the Eurozone engulfed in a sovereign debt and existential crisis. No shortage of potential Black Swan events to keep traders and investors from getting crazy optimistic. We worry about the growing euphoria on the Street, however, and took advantage of the collapse in volatility, buying SPY puts to hedge long positions.
Most important, however, valuations are not stretched as illustrated in the heat map, which ranks the S&P500 by forward P/Es. The darker the green the closer the P/E is to zero while the dark red reflect higher P/E stocks.
The S&P500 Relative Strength Index (RSI) is approaching overbought at 67, which could generate some short-term profit taking that we think will be bought and expect the Christmas ramp to continue into year-end. Giddy up, Rudolph!
Here’s something to fire you up for next week’s trading.