“Not only is the second half of December a bullish seasonal period, but last Wednesday began a period often marked by a ‘Santa Claus rally’… For what it's worth, Santa Claus did not show up for bulls during this period last year, as Christmas Eve close marked a short-term top into mid-January. The SPX’s decline on the day after Christmas last year may have hinted at short-term trouble because Dec. 26 is higher 85% of the time since 1953, per research from Bespoke…”
- Monday Morning Outlook, Dec. 29, 2025
Hints of last year’s S&P 500 Index (SPX – 6,858.47) price action repeating this year are taking hold. The second half of December was bullish. However, following historical data, a couple of seasonal patterns are not going with the script, just like last year.
First, Dec. 26 was a negative day for the market both in 2024 and 2025. This stands out as the day has the highest percentage chance of the SPX experiencing an up day at around 85%. Moreover, just as the Dec. 26, 2024 down day hinted at stocks being lower during a typical bullish period from Dec. 23 through the second trading day of the new year (known as the “Santa Claus” rally), the Dec. 26, 2025 decline has (through Friday’s close) hinted that Santa Claus missed his calling again, with Friday’s close below that of the Jan. 22 close at 6,878,49. If today’s close is above 6,878.49, it would suggest Santa Claus paid a late visit, which is better than a “no show” if you are bullish.
“Neither bulls nor bears have exerted command in these final weeks of 2025. Since mid-September, the SPX has been locked in a range between 6,550 and 6,900. Zoom in on the SPX’s price action with an hourly chart since the end of last month and you will find the index locked in a narrower range between 6,760 and 6,895…based on technical and sentiment-based observations, I would not be shocked if the range-bound trading continues into year end.”
- Monday Morning Outlook, Dec. 22, 2025
Bigger picture, the SPX remains locked in a trading range as described in the above excerpt from my commentary two weeks ago. On the days before and after Christmas, the benchmark closed above its previous Oct. 29 intraday and closing all-time highs, after languishing below these levels for nearly two months in what appeared to be a potential breakout. But the SPX did not sustain a move above these levels, re-entering its trading range that has effectively been in play since mid-September.
The SPX did peak above prior highs before year end, but my general thought process about a continuation of range-bound trading has held true as we enter 2026. It is a highly shorted market and has been for more than a year. As such, short-covering rallies could occur at any time.
But many short-term traders, based on other sentiment measures, appeared to be fully invested as we approached the end of the calendar year a few weeks ago. This group could be in the process of reducing exposure with the SPX near the top of its range.
With the SPX near range highs and even making new all-time highs recently, such optimism wasn’t misplaced and therefore not outright bearish in its implications. But, when such extremes in optimism surface, the market tends to enter a period of weakness, which in the best cases is defined range trading with a mild drawdown, or a corrective move that is more noticeable. During these weaker periods, excess optimism is washed out, which creates a headwind.
I think the headwind in the market that we are currently seeing is visible when quantifying the actions of option buyers on SPX component stocks. To the degree this group represents short-term trader sentiment, it appears that short-term traders are growing less positive on stocks, as the 10-day buy (to open) put/call volume ratio on SPX components – as depicted in the chart immediately below - rises from a low level. The unwind of excessive optimism is a headwind as traders reduce long positions and/or become less urgent to cover short positions. In the options market, traders buy more put options than call options relative to prior days during the unwind of optimism phase, creating a coincidental headwind.
There is uncertainty with respect to the chart above. The big question is, how long and how far will the unwind of optimism last that creates a headwind for stocks? Optimism hit its peak in early December, and Friday’s SPX low was around the same level of early December, so the good news is the unwind has not had much of a negative impact on the market as of now.
"With new highs last week, there is little in the way of technical resistance overhead…If this is a failed breakout that pushes the SPX back below the late-October highs, the first level of support is in the area of 6,760 (early October resistance) and 6,790 (site of the 30-day and 50-day moving averages).”
- Monday Morning Outlook, Dec. 29, 2026
In fact, note in the chart below that Friday’s SPX low was just above the 30-day and 50-day moving averages, which I mentioned last week as a first level of support. If more optimism needs to wrung out of the market, the 6,760 level could come into play, a high prior to a nasty one-day selloff in early October that is 10% above the previous February 2025 all-time closing high. At the very least, the 6,900-6,930 area (the latter of which is around last month’s closing high) could continue to act as resistance if optimism continues to unwind.
Even though some short-term sentiment indicators suggest that we are vulnerable to choppiness and or a corrective downside move, I think the wild card now and over the next several months is the fact that there are plentiful shorts who are betting against stocks (and not having much success). As such, be open to a short-covering rally if the SPX finally makes a sustained move above its recent range highs.
A new level to put on your radar for this year is 6,845 on the SPX, which is its 2025 close. As we move through the year, those anchoring to the year-to-date “breakeven” level might use 6,845 for either entry or liquidation points.
Todd Salamone is Schaeffer's Senior V.P. of Research
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