S&P 500: December
Santa's Melt Up
Week 1: Monthly Opening Note
Santa’s Melt-Up
As we enter the final month of the year, markets are trading at or near all-time highs again. The S&P 500 gained 1.06% last week, achieving its first weekly close above 6,000. The Nasdaq continued its upward trend with a 0.74% gain, while the Russell 2000, the traditional small-cap benchmark, rose 1.17%. Meanwhile, ARKK—the modern small-cap barometer—delivered impressive outperformance, climbing 3.15% for its second consecutive week of significant gains.
With the risk-off criteria remaining absent, the market appears well-positioned to continue setting new records as the year draws to a close.
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Risk Off Criteria — 0/3
In my analysis, three key components collectively determine whether the market environment is classified as risk-on or risk-off:
The Short Term Trend— price relative to the 20-day exponential moving average
Breadth— the number of stocks making new highs vs new lows across NYSE & Nasdaq markets, middle panel “Net New Highs”
Momentum— measured using the Percentage Price Oscillator, lower panel
November began with a brief risk-off alarm, but this signal dissipated almost immediately following U.S. election day. Since then, the risk-off criteria have remained absent. As of last week, the S&P 500 continues to trade above its short-term trend (5935), breadth remains positive with more stocks making new highs than lows, and momentum closed the week in positive territory and positioned to trend higher.
Navigating The Short Term
Key levels into next Sunday letter:
6000 — Continued closing prices above 6000 set the index up for the next advance
5935 — Short term moving average— first line of support
5875 — A previous all-time high range
5765 — late September all-time high range + consolidation range prior to next series breakout
Small Caps: Imminent Breakouts
ARK Innovation ETF
Throughout the year, this newsletter has highlighted ARKK as one of the most compelling trades for capturing a market melt-up scenario. I continue to hold this view and remain positioned long in ARKK.
Last week, ARKK held above the critical 52 breakout level—its longest stretch above this level since April 2022. To sustain the bullish outlook, prices must remain above the medium-term moving average (50-day exponential), which ended the week at 50.97 and is set to align with the 52 breakout level. Historically, this moving average has proven to be a reliable support during uptrends.
IWM - Russell 2000 ETF
The traditional small cap category represented by the Russell 2000 ETF is trading at record all time highs and positioned well for a breakout with sustained prices above 242.
Bonds
No changes to bond context from last week
The 20-year Treasury Bond (TLT) remains below the key $100 level, however last week the treasury bond looks to have found support just above the April 2024 low. As a general guideline for the current market, I view a move above $100 as a potential signal for growing risk-off sentiment in U.S. equities.
Summary Outlook
My market outlook and the conditions for each scenario remain unchanged. I continue to speculate that a melt-up scenario is underway. In future notes, the focus will shift to identifying signs of "a market top." This phase is often marked by overwhelming bullish sentiment and widespread euphoria, which can blind many participants to the risks.
While this tipping point doesn’t appear imminent, managing risk remains the top priority. Consider this thought as a seed planted for reflection as we approach year-end.
In the bullish scenario: position overweight long in small cap equities, namely ARKK. Signals for this scenario are the absence of “risk off criteria” in the broader market and a breakout in ARKK and IWM trading above 52 and 212, respectively. The US Small Cap trade idea category through this scenario will gain exposure.
Updates: ARKK positioning remains long
Heading into the week of the Dec 2 the bullish scenario is on.
In the bearish scenario: position short the S&P 500, and long bonds. Signals for this scenario is when all three risk-off criteria are simultaneously triggered— and long bonds becomes favored when TLT (iShares 20+ Year Treasury Bond ETF) trades above 100.
Trade Ideas
All three category trade ideas: US Small Cap Equities, Outside US Equities, and The Gold Trade were updated in last week’s letter. The updates remain relevant into the coming week—details here.
Disclaimer: The information in this article is for informational purposes only and should not be considered financial advice or a recommendation for any investment. I am not a financial advisor, and the content is not intended to serve as financial advice. It is solely intended to journal thought, ignite more thought and discussion.