As we are heading to the last trading week of the year. It is a great time to recall that it has been a year of central banks' comebacks in cutting rates and pulling an enormous amount of money into the system.

In 2019 global central banks have cut rates 51 times (top chart) in more than 20 countries (pink colour on the bottom chart).



As you can see the central banks are acting like a recession is already here. Of course, we do not know it now but we will figure it out that in the following months.

In addition to the rate cuts, they again have become net buyers of financial assets with the Federal Reserve (Fed) and the European Central Bank (ECB) on the lead. The ECB is printing as much as 20 billion euros per month (started on Nov 1), via its bond purchases program but it is nothing in comparison to the Fed.

Since September 11, 2019, the Federal Reserve's balance sheet's total assets have increased by $367 billion. It is roughly $122 billion a month! The so-called "Not QE" intervention has led to unprecedented euphoria in the market. Only since October, 8 when the "Not QE" has been officially announced the S&P 500 has increased by more than 10%.


On the above S&P 500 chart, I also included the Fed Balance Sheet projection for mid-January. If that materializes, we can experience an additional few percents rally in the main US stock market benchmark over the next 3 weeks.

If you are still skeptical about this relationship, here is the chart showing the weekly percentage change in the S&P 500 (top) and the Fed balance sheet (bottom) since 8 October.




source: zero hedge

As we know, the Fed is trying to rescue the money market but at the same time, they are juicing the market with the huge amounts of liquidity pumped into the system.

As the result of the all aforementioned interventions, the S&P 500 is up more than 28% this year and about 1% from 2013's pace when the index gained 29.6%.



If it exceeds that level in the week ahead, it would be the best year since 1997 when the market rose 31%.

It is worth emphasizing that the US stock market accounts for more than 50% of the world stock market capitalization. Thus, it is not surprising that the entire global stock market has also substantially risen.


The chart shows that the world stock market capitalization rose another $1 trillion last week and has reached $86.4 trillion worth. It is just $0.9 trillion lower than the all-time high.

Let's also not forget about The Trade War Cycle which has also had significant contribution into this rally.


The last update came on Saturday when President Donald Trump said that China and the United States achieved a breakthrough in the phase-one trade deal and they will be signing it very shortly. We will probably hear about the story many times before the actual deal will be signed.

After we went through the main market drivers over the last several weeks it is time to answer what to expect in the last several trading days.

At first, certainly, lower than usual volumes. Many market participants such as financial institutions employees will likely use this time to take some vacations. Also, on Christmas Eve (Wednesday), most exchanges will be closed with some having early close, like in the US at 13:00. You can find more details under the link:

https://au.investing.com/holiday-calendar/

From the price action perspective, I expect this rally to calm and maybe even a market correction until will see a continuation. For a few reasons.
DISCLAIMER: At the end of the last week I opened a small short position with the short-term investment horizon (from a few days to a couple of weeks).


First, as you can see on the bottom part of the chart, the S&P 500 is in the overbought (more than 70) territory using Relative Strength Indicator. This rally also resembles the end of 2017 and the beginning of 2018 (red circle) when in February dramatic correction followed. You do not really often see that large deviation of the index' from the 200-day moving average (yellow line).

It is, of course, a consequence of super positive sentiment among market participants.

source: CNN

The popular Fear & Greed Index has reached an extreme greed, the level not seen since 2017. If you want to dig in more into its methodology, here is the link:
https://money.cnn.com/data/fear-and-greed/

Extreme bullishness is also seen in the options market. For those who are not familiar with the option instruments, I recently tweeted a brief explanation.



The above statistics show that with having this high level of call options relative to put options the market median return within the next 2 weeks was -2.04% over the last 5 years.

The last one is a very low level of the Volatility (VIX) index, also called the fear index.



I believe that the index found its support on the bottom red line and will soon break up to the upside (top red line) which may accelerate potential US stock market sell-off.

In the end I would like to briefly look at gold. In the recent market wrap I wrote:

"It looks like RSI may be testing falling trend (bottom part of the chart). Watch it closely for the potential break."


As you can see on the bottom part of the chart, the RSI has actually broken to the upside, I expect the gold price to follow and break the-so called bull flag (two red lines) higher, supported by the central banks' monetary easing (money injections into the system).

At this point, I want to wish you all a great holiday period. Thank you for being here and contributing on Twitter. Also, expect a short summary of the most important 2019 events and what do I expect from 2020.

Take care.

Seb

Disclaimer: This content includes only personal opinion and that should not be considered professional financial investment advice.