Will the crazy rally of the US stock market stop after repeatedly hitting new highs and squeezing short sellers?

According to the Zhitong Finance APP, despite rising valuations and signs of excessive speculation intensifying concerns that U.S. stocks may have been due for a correction, the momentum of continuous gains shows almost no signs of slowing down as the year comes to an end.

Last Friday, the S&P 500 index set its 57th closing record of the year, driven by a strong U.S. economy, expectations of interest rate cuts, and excitement over the tax cuts and deregulation promised by incoming President Trump, with the index rising nearly 28% in 2024.

Strong momentum has been a hallmark of this rally. The S&P 500 index has not deviated by 10% or more from its historical peak for over 13 months, marking the longest duration in nearly three years. Data from Bank of America Global Research shows that historically, the index experiences a 10% or greater correction on average once a year.

Steve Sosnick, Chief Strategist at Interactive Brokers, stated, "Momentum is the driving force behind the market. The current market is basically a freight train, and no one really wants to stand in its way."

Historically, shorting a market with a strong upward trend is risky: according to analysis from LSEG, since 1928, the S&P 500 index has achieved annual gains of 20% or more five times in a row, and each time it rose three months later, with an average gain of 6.3%. The index rose 24.2% last year.

"Momentum breeds trends," said Sonu Varghese, Global Macro Strategist at Carson Group, which has increased its stock holdings, "You should trade with the trend."

However, the strong rally has led some fervent bulls to begin questioning whether the stock market should take a breather.

Michael Hartnett of Bank of America pointed out last Friday that the S&P 500 index's price-to-earnings ratio is at 5.3 times, exceeding the peak in March 2000, and warned of the risk of "overshooting" in the first quarter of 2025. He also agreed with signs of "bubbles" in the broader market, including Bitcoin's historic surge above $100,000 for the first time after last week's election.

The bank's target for the S&P 500 index next year is 6666 points, more than 9% higher than current levels.

Ed Yardeni, founder of Yardeni Research, cited various indicators showing bullish market sentiment, including the consumer confidence index for November, which indicated that a record 56.4% of consumers expect the stock market to rise in the next 12 months.

Extreme sentiment is often viewed as a contrarian indicator, as it raises the threshold for positive factors to emerge.

Yardeni wrote, "At this point, there may be too many bulls." He added that a short-term pullback could present a buying opportunity for investors.

Lori Calvasina, head of U.S. equity research at RBC, expressed increasing concern at the end of November that high investor positioning and valuations could make the S&P 500 index susceptible to a 5% to 10% correction.

The index's current expected price-to-earnings ratio is 22.6 times, while the historical average is 15.77 times.

Nevertheless, there are currently almost no signs that these concerns are affecting the broader market. For example, the Chicago Board Options Exchange Volatility Index (VIX) measures the demand for protection against market volatility The index briefly reached a four-year high during the intense market turbulence in August but fell to a nearly five-month low of 12.75 last Friday.

The historical data of the VIX index suggests that market calm may persist for a while. Once the index closes below 14 points, as it did in late November, it typically takes an average of 136 trading days to rise above 20 points—a level associated with moderate market volatility.

The historical record of strong stock market performance in December may also boost investor confidence.

According to analysis by LPL Financial, the S&P 500 index has an average gain of about 1.6% in December, with a 74% probability of rising that month, making it the month with the highest probability of gains in the year.

Of course, market reversals are inevitable at times. A potential trigger could be the volatility caused by Trump's threat to impose high tariffs on U.S. trading partners such as Canada, Mexico, and China. Strategists warn that a full-blown trade war could offset the positive effects of policies like tax cuts and deregulation.

However, many investors are content to remain on the sidelines for now.

Mark Newton, head of technical strategy at Fundstrat Global Advisors, believes that short-term "overbought" conditions (a technical term indicating that the market has risen too high too quickly) are not sufficient reason to exit the stock market.

"I just find it hard to sell the stock market here," Newton said