The S&P 500 held its lows from Thursday’s regular session and saw a rise after Friday’s opening. Intraday retreats were brief, allowing only quick gains. The Nasdaq showed signs of weakening leadership, yet the S&P 500 continued making higher intraday highs. After the market overcame the 6,850 level, it consolidated below 6,889 before surpassing it later.
Possible Santa Claus Rally
Semiconductor and discretionary stocks were sold off towards the close, unlike the Nasdaq, biotech, or small caps. This hints that the “Santa Claus rally” might soon start its opening phase. Notably, NVIDIA gained almost 4% in a day. Market volatility has declined, and Wednesday’s downturn was fully reversed.
Meanwhile, the yen saw depreciation following market developments, marking a crucial stock market turn on Friday. A recent inflation report suggested a cooling in price pressures, though typically one month of data doesn’t significantly alter Federal Reserve policy. XRP saw a rebound, with ETFs observing their highest inflow since December 8, indicating increasing institutional interest.
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The market has successfully absorbed recent selling pressure, with volatility metrics declining and Wednesday’s sharp drop being fully erased. We’ve seen an important turn that suggests the opening stages of a Santa Claus rally are upon us. Historical data shows that the final week of the year has been positive for stocks over 75% of the time since 1950, a powerful seasonal trend we should not ignore.
Market leadership is broadening beyond just the big Nasdaq names, as seen by the relative strength in small caps and biotech towards the end of last week. While big tech names like NVDA are still performing well, this rotation indicates a healthier overall market advance. Therefore, we should consider looking at call options on broader market ETFs like SPY or IWM, rather than concentrating solely on the QQQ.
Implications of Current Market Environment
With the CBOE Volatility Index (VIX) recently falling to just under 13, option premiums are relatively inexpensive. This presents a favorable environment for buying call options or implementing bull call spreads to capture potential upside over the next two shortened trading weeks. Looking back, we saw a similar VIX compression in late 2023, just before that year’s final rally took hold.
We are also entering the period of institutional “window dressing,” where fund managers add 2025’s winning stocks to their portfolios to show strong year-end holdings. This can create a self-fulfilling prophecy for momentum stocks that have performed well throughout the year. The recent 4% daily gain in NVDA is a prime example of this phenomenon in action.
The market has shrugged off potential headwinds, such as the Bank of Japan’s recent policy discussions, which failed to strengthen the yen or derail risk appetite. Furthermore, the November 2025 CPI report, which showed inflation cooling to a 2.9% annual rate, has given the market confidence that the Federal Reserve is done with its tightening cycle. This backdrop provides a clear runway for equities to drift higher into the new year.
