Note from DTA: Shah originally published the following idea on Thursday. We’re a couple days delayed in sharing it, but it’s still very much worth checking out.

Traditionally, a Santa Claus rally refers to gains in the stock market happening in December, specifically over the last five days of the month into the first few days of the new year. Since 1950, the average gain over that period, in 70% of those Decembers, was 1.3%.

But this December might be different. We could see Santa come early and re-gift markets throughout the month into the new year.

We’re at a crossroads of three events that all have the potential to push the market higher, starting literally today. If even one of those things happens, we’ll get a bump.

If all three happen? Money could come pouring in.

The odds are pretty good, and this is an excellent opportunity for you to get in on what could be one of the best profit plays this year.

Let me tell you what to look for and exactly what to do.

These Three Events Will Kick Off the Santa Claus Rally
The first sign is a Personal Consumption Expenditure (aka PCE) print lower than consensus expectation. The Fed’s favored measure of inflation, the PCE number, drops at 8:30 am today. If that’s a print the markets like, they should start rallying immediately.

Next, watch for whether the S&P 500 can get to and rise above short-term resistance at 4050, the S&P’s 200-day moving average. If it manages that hurdle, the next and all-important resistance level is at 4100. That’s where the index meets its bear market down-trending channel marker. Each rally off market lows this year died right at that level.

Getting above 4100 this time would be a surefire positive for investors hoping for something more than a bear market rally or dead cat bounce.

Then, on December 13, 2022, the day before the Fed’s following FOMC rate announcement on the 14th, we get to see what November’s CPI (Consumer Price Index) has to say about inflation. If CPI comes in below trend, markets will rally.

If the SPX rallies above 4100 on that news, we’re going higher. If the S&P is already above 4100 and CPI comes in well below consensus expectations, we’re going a good bit higher. And we’d only be in the middle of the month.

If inflation looks like its abating, and the Fed raises only 50 basis points at their December 14, 2022 meeting, and stocks are already moving up, at or above resistance levels, money should come pouring in off the sidelines.

That’s a lot to hope for, I know, but entirely possible and more likely than markets crumbling just as we appear to be seeing signs of possibly peak inflation, as well as the beginning of the end of the Fed’s big rate hikes.

And guess what we could see on the heels of an incipient rally? A lot of FOMO, or fear of missing out.

An early rally in December could easily see the S&P pop by 3-5%. That would leave a lot of money managers in the dust and force them to pile in for fear of missing out on a December to remember.

While it seems like a lot of stuff has to fall into place here, the proverbial writing is already on the wall.

To get in on the potential gifts Santa may throw our way, buy calls or call spreads on the S&P 500 (ticker is SPX), or better yet, on one of the underperforming benchmarks like we’re doing in my subscription service.

Here’s hoping for a Merry Christmas for all of us.

— Shah Gilani

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Source: Total Wealth