Stocks are trying to live up to the expectations for a year-end "Santa Claus" rally. Most of the market's improving internal condition is due to the latest strength in the energy sector, with the NYSE Oil Index (XOI) rallying some 6% from its recent lows.

Although recent trading volume has been far lighter than normal, the NYSE advance/decline ratio for Dec. 23 was an exceptional 13:1 in favor of upside volume. That completely reversed the 1:11 downside volume day on Dec. 11. It also was the first time since Oct. 5 that the up/down volume ratio has been so high in favor of advancing volume. While the Dec. 23 big volume ratio may have been a holiday-related aberration, if it's followed by a 9:1 up/down volume ratio in the next few days it will qualify as a major volume reversal signal which would mean at least a temporary reprieve from the selling pressure of the last few months.

The key to the holiday rally has been short covering in the two biggest problem areas for the stock market: energy stocks and China ADRs. The 6%+ rally in the XOI mentioned above was mainly the result of a rally in the crude oil price. As you can see in the following graph, crude oil still hasn't closed the two days higher above the 15-day moving average required to confirm an immediate-term bottom, but it's testing this important trend line.

A reversal of the oil price decline, even temporarily, would undoubtedly give the equity market a relief from the selling pressure that has plagued it for months. Most of the stocks showing up on the NYSE new 52-week lows list have been energy sector stocks. An oil price rally would result in spillover strength in oil/gas stocks, which in turn would almost certainly put the new 52-week lows below 40 on a daily basis. Remember that we need to see a few consecutive days of less than 40 new lows to confirm that internal selling pressure has lifted. For the last three days there have been fewer than 40 new lows - the lowest 3-day number since the first three days of November, which was the last time there were less than 40 new lows.

Here's what the reversal of new lows in the last couple of days has done to the important NYSE short-term directional indicator. As you can see, both the short-term directional (blue line) and momentum bias (red line) indictors are trying to reverse the decline of the past weeks. A confirmed reversal of both indicators would mean that the stock market's near-term path of least resistance has turned up in favor of the bulls.

Below is the dominant intermediate-term component of the NYSE Hi-Lo Momentum Index (HILMO). This particular indicator is important for determining the market's intermediate-term bias. Note that after several weeks of declining, this indicator is also trying to reverse.

While it's still too early to get excited in light of the historical tendency for the market to rally in late December (the so-called "Santa Claus rally"), if the internal momentum indicators show continued and substantial improvement after January 1, the odds will finally tilt in favor of the bulls eventually regaining control of the intermediate-term trend.

Speaking of intermediate-term trend, our interim trend indicator has turned from bearish to neutral and is on the cusp of potentially reversing. If at least four of the six major indices (Dow, SPX, NDX, NYA, MID, RUT) finish the week above the 60-day moving average, the trend indicator will tilt bullish. It wouldn't mean that the stock market's troubles are completely over, only that a temporary reprieve has been granted for early 2016. The next few days will at least tell us what we can probably expect for January.

Below is the SPDR Barclays High Yield Index (JNK) has been a major leading indicator for the stock market for 2015. The decline to multi-year lows in high-yield bond prices was largely a consequence of the stress in the oil and gas industry, courtesy of plunging oil prices. Note that JNK is testing its 15-day MA (below).

The fate of high yield "junk" bonds also ultimately depends on the resolution of the oil/gas stock bear market. High yield corporate energy bonds have been in a tailspin since the shale oil "fracking" bust began, and this has put dramatic pressure on the debt of oil/gas exploration companies. This debt-related stress is captured in the downward trajectory of the SPDR Barclays High Yield Bond ETF (JNK) shown above. As you can see, JNK hasn't been able to close above its 15-day MA since October and, as such, remains firmly in the grip of the bears. However, if JNK confirms an immediate-term bottom in the next few days it would provide another indication that near-term selling pressure for the stock market has lifted.

Returning to the broad market outlook, a New Year's rally largely depends on continued improvement in the internal condition of the NYSE. The most important indicator of NYSE broad market health is of course the new 52-week highs and lows. When traders and fund managers return from the holidays next week, we'll have a much better idea of what the market's near-term direction is likely to be since this will tell us whether the recent contraction in new 52-week lows is a holiday-related aberration or the start of internal recovery.

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