Home Markets News & Opinions Whales are Making Big Money on a Tanking S&P 500, But Santa Claus Rally Is Still Coming: Hedge Fund Manager

Whales are Making Big Money on a Tanking S&P 500, But Santa Claus Rally Is Still Coming: Hedge Fund Manager

Kiril Nikolaev
Last Updated September 23, 2020 1:19 PM
  • The S&P 500 succumbed to intense selling pressure to start December.
  • Analysts predict more blood on the horizon but consider the selloff as healthy.
  • A particular trader sees the S&P 500 ripping just before the end of the year.

The first two trading days of December have been blood for the the S&P 500. The index is down by as much as 2.3% and was on track to wipe out all of November’s gains in just two days. Fortunately, bulls stepped in and pushed this stock market index above 3,090.

Will Meade, a former Goldman Sachs analyst, reads the options market. The hedge fund manager observed that smart money investors are placing puts on the SPX. He predicted that fund managers were cashing out to lock in gains and get their paychecks before the end of the year. That’s exactly what happened.

SPY options
Analyst Will Meade was right on the money. | Source: Twitter 

Even with Tuesday’s late recovery, it appears that the selloff is far from over. It is very likely that the stock market will continue to plunge before rallying towards the end of the month.

Early December Dip to Set Up Late December Rip for S&P 500

It appears that December is about to get bloodier. Will Meade shared on Twitter that a whale placed a $31 million put trade in the S&P 500. For the hedge fund manager, the trade is a clear sign that smart money investors are taking profits. More importantly, the magnitude of the put order indicates that the index is about to take a turn for the worse.

S&P 500 index puts
Whales plan to make big money while taking profits and driving down the SPX. | Source: Twitter 

From a technical perspective, a significant retracement makes sense. The S&P 500 had been climbing since October. From the low of 2,892.7, the index soared to an all-time high of 3,154.30 in November. That’s a monster rally of over 9% in two months.

It’s not surprising that the index is overvalued in both the weekly and daily time frames.

S&P 500 chart
The S&P 500 is showing signs of bullish exhaustion. | Source: TradingView

Mark Minervini is not troubled by the correction. According to the trader, the index is likely to retrace between 3% and 5% from the all-time high. The range of the pullback puts the S&P 500 close to the 3,000 support.

Prominent stock market trader believes that the correction should be expected
Prominent stock market trader believes that the correction should be expected, | Source: Twitter 

Santa Claus Rally Likely to Happen Late

A dump to 3,000 might hurt your portfolio, especially if you bought the top. However, a pseudonymous trader named JE$US is confident that bulls will end December on a high note. The trader revealed that December is historically a bullish month. Bulls have controlled the last month of the year 73.6% of the time with a 1.29% average return.

The numbers favor the bulls
The numbers favor the bulls. | Source: Twitter 

Here’s the catch: Bulls make their move towards the end of the month. JE$US revealed that the S&P 500 roars during the last five days of the year. The index is up 75.82% of the time in the last five trading sessions of December.

The trader also emphasized that the Santa Claus rally often covers the last week of December and the first two weeks of the following year. The three-week period offers an average return of 1.70%.

Fund managers may be dumping now and profiting from the selloff. From a technical perspective, the period of profit-taking gives indicators time to cool off. By the end of the month, conditions would be ideal for a bounce. It’s possible that the ones selling now would eventually resume buying stocks and kick off the Santa Claus rally.

Disclaimer: The above should not be considered trading advice from CCN.com.