Santa Called. Bulls Excited on Wall. Could There be a Fall?

Although it wasn’t much for the bulls to celebrate, Santa Claus did call to Broad & Wall. The last five days of 2019 plus the first two days of 2020 finished slightly in the green for the &P 500 by 0.34%. The media would have you believe that this 7 day trading period now holds untold fortunes for stock investors versus any old random year. That’s simply not the case, even when giving the bulls the benefit of the doubt by including the first two days of the year in the calculations when it would be impossible to invest until the Santa Claus Rally (SCR) ended.

Let’s take a deeper dive.

First, I have daily stock market data back to 1926 and while I could go all the way almost 100 years, I chose not to. I have always said that markets morph and evolve. What happened that far back when stocks traded on Saturdays and were closed for war has absolutely no bearing on today. Lots of folks use data since 1950. I do as well for some studies and when I am not lazy. My favorite periods to use are since 1990 and since 2000. I think a whole lot changed after the crash of 1987 and then again in 2001 and 2007.

Here is what I learned. Since 1990 77% of the calendar years have been up using the total return for the S&P 500. After a positive SCR, 81% of the years have been up. In other words, the difference is one single year, deeming it statistically irrelevant.

That disappointed me. So I went a step further.

I looked at all years where Q4 was positive, the calendar year was positive and the SCR was positive. There were 14 since 1990. Of those 14 years, the next calendar year finished higher 12 times or 85%. If you are curious, the failed years were the first and last in my study, 1990 and 2018.

Furthermore, 1990 and 2018 were also the only years in the 14 where there was a 10%+ stock market decline during the first quarter of the year.

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A Little Taste for the Bears – Santa Still in Play

Stocks roared out of the gate to begin 2020 and it certainly felt like the masses were buying hand over fist. However, let’s remember that this is a holiday-shortened week and I don’t think everyone is back to their normal schedules. With stocks closing at their highs for the day, it’s very unlikely that any peak of importance was seen.

Several times last week I mentioned my last 5 and Santa Claus Rally research. The last 5 was reduced to a coin flip in my work and well, the S&P 500 was basically flat. Today ends the SCR and the bulls want to see 3224 closed above for Santa to have officially called Broad and Wall as Yale Hirsch’s adage goes. Despite what looks to be a nasty open based on the U.S. taking out a top Iranian terrorist and tensions flaring in the Middle East, I think Santa is safe this year. I would be surprised to see a bad opening followed by afternoon selling below 3224.

With sentiment at historic extremes, greed is running very hot and only market weakness can cure that. I still find it hard to believe that any real pullback will start from news like this. Perhaps we will see a mild pullback right here and then another rally to new highs where a real pullback begins.

Finally, I left off on Monday with a tease about another seasonal trade about to unfold. One that has a very strong track record. Unfortunately, given the narrow difference in performance between the major indices to close the year, the trade is a bit muted through its period ending on January 8. That trade says to own the Russell 2000. We’ll see how it plays out.

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3224 the Key Number for Santa

Friday’s action in the stock market wasn’t the victory the bulls were claiming. After another higher opening, the bears made a tiny stand and managed to fend off higher prices for a few hours. That’s about all you can say besides there were more stocks declining than advancing. I know; I am grasping at straws into year-end. However, make no mistake about the historic sentiment readings we are currently seeing now. This is the polar opposite of what we saw one year ago when the masses were screaming about a 2008 redux. Caution will be warranted in Q1 of 2020.

I shared my research on the last five trading days as well as the Santa Claus Rally (SCR) and the bulls need the S&P 500 to close above 3224 on January 3rd for Santa to officially call. As my work showed, it won’t be surprising to see the S&P 500 close below 3224 on December 31st. This is what usually happens when stocks are up strongly during the year as well as Q4. There will be another seasonal trade coming up on Tuesday’s close through the first five trading days of 2020. I will share it as soon as I know what it is!

With month, quarter and year-end just about here, I am about to enter the busiest time of my year. Add in my report to clients and Fearless Forecast, there will be a lot going on over the next month. And I am still rehabbing my ankle and shoulder 6 days a week. I mention this as posting here may be a bit erratic, but I will do my best as always.

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All Looks Terrific But Be Careful

I hope everyone had a great Christmas, Hanukah, Kwanzaa and Boxing Day!

As I wrote about the other day, the Santa Claus Rally and last five days of the year are not the absolute layup the pundits keep predicting. In strong years, the last five days trade is not even a coin flip, however, Santa still comes calling about 70% of the time. That puts added bullish weight on the first two days of 2020 if the last five of 2019 are down.

It is amazing that even the bears are conceding how bullish the stock market is right now. Almost every measure of sentiment I look is showing extreme greed. My Twitter feed has been full of the CNN Fear/Greed needle which is pinned on extremely greedy. However, the masses aren’t doing their homework because that indicator has done a poor job at market peaks. The other measures, like put/call ratios, sentiment surveys and money flows are all looking very similar to January 2018, late 1999 and other extremes.

While I don’t think the conclusion is to sell everything here, risk has certainly increased dramatically and it pays to dance very close to the door. That will likely be a theme of mine when I release my 2020 Fearless Forecast in a week or so.

Index leadership has been very strong from the NASDAQ 100, but the S&P 400 and Russell 2000 has been disappointing although they both met my forecasts by achieving new highs.

While the stock market has pressed higher and higher, it’s worth noting that semis, banks and transports, three of my four key sectors, are not making new highs for the rally. Tuck that under your cap but don’t forget about it. Discretionary on the other hand is a sector I offered as a solid trading opportunity on December 16. At that time, it looked coiled up and ready to bust higher. Today, we can see it below and it has been a nice little run.

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Stocks CREEP Higher – Waiting on Santa

Let’s start this article with the big picture. The bull market is alive and reasonably well and will live on into 2020. Next year will likely present some challenges, but we will cross that bridge when I start to work on my 2020 Fearless Forecast. One thing is for absolute sure in my opinion; there will be fireworks in 2020!

For roughly a month, mostly on the blog, I had been discussing a stock market that was a little ahead of itself and then a little tired in the very short-term. In my lexicon, that meant I would hold the positions I had, but not add any new money nor increase risk. I did a pretty good of sticking to this although I did put some new money to work last week.

Over the past month, it certainly “felt” like stocks surged higher as they crept higher and higher almost every day. Before checking, I would have guessed that the S&P 500 was up by 5% since Thanksgiving. However, the real number is 2%, certainly nothing to sneeze at, but also not the melt up so many pundits have been forecasting.

Markets that creep higher and higher feel like larger magnitude moves as they occur because the pullbacks are so brief and shallow. Creeper markets also tend to give back so much of the gains in one fell swoop down the road. I will not be surprised to see that happen sometime in Q1 2020.

Anyway, since the little post-Thanksgiving low on December 3rd, the stock market rally has occurred almost entirely at the open. That’s not a bad thing. That’s not a good thing. Below you can see an hourly chart of the S&P 500.

Look at all of the areas where there is no red or green candles. Those are the gap up openings. Each one is followed by the market going sideways for a period of time before gapping higher again. One thing we should look for is a change in character where stocks gap higher, but instead of going sideways and then higher, they just sell off and don’t immediately recover.

Now, my valued readers, before you stop reading and start thinking that the most bullish person out there has turned negative, think again. I am only talking about short-term noise, at least for now. Under 5% moves. There are many concerns about the frothiness of investor sentiment (and it’s really greedy out there now), but I am going to wait and cover that another time.

Historically, the market is in the midst of one of the most favorable times of the year from now through early January. And the traditional Santa Claus Rally (SCR) is scheduled to begin on Christmas Eve. That’s five trading days before year-end. Remember the old adage made popular by Yale Hirsch from the Stock Trader’s Almanac? “If Santa Claus should fail to call, bears may come to Broad and Wall.” While Yale posited that a bear market would ensue, the truth of the matter is that a decline usually follows during the first half of the new year with Q1 being the most likely time.

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2019 A LOT Different from 2018 – Fedex Vomits on Itself

Stocks have really quieted down of late, but the bulls have been relentless. Each and every day seems like a slow drift higher. What has historically been a very reliable soft patch into mid-December is not arriving in 2019 or if I wanted to claim victory like those who can never be wrong, I would just say the two-day decline early in the month was it. That’s not exactly what I was looking for, but you always have to roll with the punches and take what the market gives you.

A year ago at this time, stocks were breaching critical price levels and beginning one of the most vicious selling waves of the past 100 years, not to mention the worst December since 1931. 10 straight days where the S&P 500 closed lower than where it opened. Almost no security was unscathed except for those involving fixed income.

Today, we don’t have the exact opposite, but it’s certainly in that direction with lots of stock market melt ups and taking on more risk chatter from the pundits. While they could and may happen, I don’t know how people wait so long in a rally before all of a sudden proclaiming that the good times are here. It seems crazy. Where were all these people when smart money was pounding so hard on the table for all-time highs this year when the Dow was below 24,000???

Last night, Federal Express missed earnings by a wide margin and the stock is in the toilet today on historic volume. The bulls really want to see the stock close where it opened, if not higher than that for any any hopes of a year-end bounce. For those wondering about tax loss selling in Fedex, I am not so concerned since the stock is less than 10% this year.

What I am concerned about is my call for the transports to play catch up and break out to the upside over the coming weeks. Fedex’s flop doesn’t make this easy as I was counting on Fedex not disappointing to at least not hurt the sector. Now, we need some big help from the rails and/or the airlines, which is possible but not as easy as I thought it would be.

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Bulls Powering Through Short-Term Fatigue

With the Fed, UK elections, tariff deadline and impeachment seemingly all out of the way, stocks continue to forge ahead, even in the face of some short-term fatigue. That’s obviously  bullish in and of itself. As I mentioned last week, it is very tough to see any kind of measurable selling this late in such a strong year. Something would really have to come out of left field.

I have spent a good deal of time on small caps of late, and more specifically small cap value. I continue to like that play into year-end. Semis have been my favorite sector for almost all of 2019, but it’s really hard to throw more money at it given its run and relentless surge this month. Banks and financials recently broke out and they should have legs higher. Transports seem to be teasing me, but I still have conviction that they will play catch up in a big way sooner than later. And discretionary which I wrote about here, are on the verge of a very interesting breakout. This could be a fun sector to trade with a very favorable risk/reward ratio.

I haven’t discussed the NYSE Advance/Decline Line lately, but just like so many other things in the market, it is behaving perfectly well. It just keeps scoring new high after new high. And as I have said time and time again for years and years and years, bull markets do not end with the A/D line at new highs, at least they haven’t 90% of the time. Those are odds I will take every single opportunity I can.

 

Finally, I can’t tell you how many people scoffed when I started talking about Dow 30,000 before all was said and done. Don’t look now. That’s only 1700 points away…

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Small Cap Value FINALLY Breaks Out – Stocks Tired

Going in to this week, the markets had four big issue to deal with. The Fed, UK election, Dec 15 tariffs and impeachment. I really thought one of the first three would have caused one of those 1-3 day shakeouts into the usual mid-December low this or next week. That certainly hasn’t been the case and as I have said all along, I think impeachment is a just a media distraction and nothing to take seriously for the economy nor markets.

We left off on Fed day and as expected, there was no reaction at all to the lack of action nor Powell’s press conference. Stocks were strong on Thursday after yet another one of President Trump’s tweets regarding the trade talks with China. And silly me thought Phase I was already completed and we were just waiting for the papering, at least that’s what we were told last month.

Stocks definitely look a little tired and I won’t be surprised if we see red arrows to close the week. Small caps are stepping up, something I have been mentioning as a precursor to the next leg higher. Below is a change from the Russell 2000 chart I have been showing, but it’s certainly very similar. It’s the Russell 2000 index of value companies instead of all companies. It was the last small cap component to break out above that blue horizontal line which it did on Thursday.

Bulls will argue that this is an important change that signals higher prices while bears are hoping that price immediately fails, traps the bulls and returns into the range. I won’t be surprised to see both parties win here.

Nothing is really changing on the sector front. My favorites remain strong with semis and banks leading the bulls’ charge. Discretionary continues to percolate while transports should be getting ready to bust higher. Since the little low 10 days ago, energy has quietly surged, but because of how decimated it has been, I am not getting too excited just yet.

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Small Stocks Continue to Look Interesting

For the past few weeks, I have been mentioning the action the Russell 2000 index of small cap stocks. Along with the S&P 400 index of mid cap stocks, this group has been lagging the returns of the more popular Dow, S&P 500 and NASDAQ 100. I continue to believe the Russell’s fortunes are changing, if only for a short period of time.

Below is a chart I have shown a few times before. It’s the Russell 2000 with the most widely watched horizontal line (blue) in the markets. The masses were watching to see if the Russell could finally break out above the line and stay above the line. While the jury is still out, I do believe that is happening and will happen this month.

Let’s also remember that seasonally, December and the first part of January is historically strong for small caps versus large caps. While that doesn’t mean it occurs every single year, 2019 certainly looks like good risk/reward.

Over the coming week or so, there are enough macro events that some downside volatility should not be surprising. The Fed meets on Tuesday and Wednesday. Impeachment proceedings continue. Trump’s deadline of December 15 for more tariffs looms. As I write about every year, it’s very difficult to see significant and sustained downside so late in the year. Obviously, it’s not 100% as 2018 and 2000 were ugly, but as you knows, the odds don’t favor it. And this year with stocks up by a healthy margin, it’s going to be even more difficult for the bears to make much noise until 2020.

Stocks could certainly revisit or even slightly and quickly breach last week’s lows, but that would present yet another buying opportunity for new highs into January.

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Was That All?

On Wednesday, I wrote that stocks were supposed to bounce and not to be surprised if they regained all they lost a few days earlier. However, the odds did not favor the whole pullback/consolidation being over. I am still in that camp although with this morning’s much stronger than expected employment report and the pre-market surge, I guess I have to be open to the notion that the little bout of weakness is over. We will certainly see in the coming days if all of the major stock market indices can hit fresh highs.

As I have mentioned for a month, by turning neutral to slightly negative in the short-term, it simply meant that I was basically in a holding pattern and not committing new money to stocks nor raising risk levels. In a perfect world, any pullback would be used to make some small modifications for the run into year-end I have been discussing.

I have been saying that leadership from the Dow, S&P 500 and NASDAQ 100 should cede to the lagging S&P 400 and Russell 2000. I continue to believe that with the two latters finally hitting all-time highs early in 2020. My four key sectors are all in good shape. Semis and banks continue to lead and be strong. Transports have a strong ceiling overhead but I expect that to be breached in early 2020.

Discretionary offers an interesting opportunity as you can see below. Price has been in a range for 6 months with continued compression. Highs are lower. Lows are higher. Think of a coiled spring. Usually, prices will ultimately continue with the previous trend, in this case, higher. Sometimes, prices breach one side first as a fake out and the immediately head in the opposite direction, trapping the masses. In this case, while I believe the upside will win out, it doesn’t pay to take a stance right here.

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