Will Santa Claus Call to Broad & Wall?

Yale Hirsch of Stock Trader’s Almanac fame (and a perennial must own book now written by his son Jeff) coined the phrase, “If Santa Claus fails to call, bears may come to Broad & Wall”. Research showed that if the last five trading days of the year and first two trading days of the New Year (Santa Claus rally) did not show a positive return, a bear market or significant correction was likely during the coming year.

Bears love to point out that Santa did not call in 1999 nor 2007 when two devastating bear markets were about to unfold. However, Santa also did not call in 1990, 1992, 1993 and 2004, yet no bear market or major correction ensued the following year. Santa also did not come in 2014, but I am guessing that the 15% summer decline married that up. In 2015, Santa was a no show and stocks were in in the midst of a 15% correction which bottomed on January 20.

Conversely, Santa called in 2010, but stocks saw a 20% decline in 2011. Santa came in 2000 and 2001, however 2001 and 2002 were awful bear market years. 1997 saw a big Santa Claus rally, yet 1998 had a 20% correction. The same can be said about 1989 and 1986.

In the end, Santa Claus usually calls, which you would expect as down markets only occur roughly one third of the time. Over the past 46 years, the Santa Claus rally has been seen 74% of the time. Since 1990, it’s just under 70% and 75% since 2000. Detractors, however, will say that he has been absent two straight years. New trend beginning or will 2016 revert back to the tried and true?!?!

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Beware of Believing in Santa Claus

The traditional Santa Claus rally of the last five trading days of the year did not materialize. As I have mentioned before, Yale Hirsch of Stock Traders Almanac fame made popular the rhyme, “If Santa Claus should fail to call, bears may come to Broad and Wall”, meaning that bear markets typically follow in the ensuing years where there is no Santa Claus rally. While it all sounds nice and neat, the data do not support that conclusion.

In 2014, the last five days were down, but 2015, while difficult, was not a bear market year. 2012 saw Santa fail to call, but 2013 was a huge year for stocks. 2010 saw a mixed last five days which led to a flat 2011 although there was a 20% correction during the year. 2009 saw another mixed last five days, but 2010 was a strong year for stocks.

2007 was strongly down during the final five days and that correctly led to the worst year for stocks since the 1930s. 2005 also was a victory for the bears, but 2006 was a banner year for the bulls. 2002 saw a horrible close to the year, but 2003 launched a new bull market a enormous year for the stock market.

On the flip side, 2000, 2001 and 2002 were all bear market years, but the previous Santa Claus indicator failed to warn. As with many other stock market adages, what once worked and became tried and true no longer stands up to scrutiny.

I have a different method for the Santa Claus rally and I have been using this in my portfolios since the early 1990s. There are a set of rules that help identify a December low that is usually plus or minus a number of days around options expiration. From that low there has been a 90% probability of a rally into year-end over the past 25 years. The average percent gains have been staggering.

S&P 500 +2.83%

NASDAQ 100 +4.24%

Russell 2000 +4.13%

S&P 400 +4.24%

2015’s results were below average, but still between 1.33% and 1.91%.

Of note, 2015 was the first year in AT LEAST 26 years where the S&P 500 was the leading index from my December Santa Claus low to year-end. I am not sure what it means, but it’s something to watch this week.

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Santa Claus is in the House!

The last week of 2015. I hope you have been enjoying the holidays.

The major stock market indices continue to behave as I spelled out over the past few weeks. Santa Claus came right on schedule and the seasonal trend has him taking a break to close the year with some mild strength to begin 2016. While I was very pleased that stocks reversed early last week and have followed through on the gains, we still need to see all of the indices close above their Fed day highs from two weeks ago. The S&P 400 and Russell 2000 seem poised to accomplish this right here, but the Dow, S&P 500 and NASDAQ 100 have a little more work to do.

Intermediate-term, last week’s upside reversal could have significant bullish consequences, but given the lower volume and diminished liquidity, I would like to see more confirmation. New highs/news lows, stocks advancing and declining and up and down volume all went from fairly negative to strongly positive over the span of a single week. Historically, that leads to double digit upside over the coming months.

On the sector front, it’s going to be vital for high quality leadership to emerge sooner than later. Defensive sectors like consumer staples have been leading, but the semis and consumer discretionary are trying to step up.

Lots of crosscurrents and trends this time of year, but most are bullish and high probability.

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Waiting for Warm & Fuzzy

The “traditional” Santa Claus Rally ended in the red for the stock market and that’s not a warm and fuzzy sign heading into 2015. Through the first 3+ days into 2015, small cap stocks are not leading their large cap brethren and that’s not a warm and fuzzy sign. Stocks sold off hard to begin the year and that hasn’t been a warm and fuzzy sign.

Today, the bull are trying to make a stand after seeing yet another 5% pullback in stocks that is being gobbled up. Could we have just seen a successful revisiting of the December lows that leads to new highs this month? It’s certainly a plausible scenario and one I am positioned for. However, I am not yet convinced that the decline is over.

The market looks too sloppy. Two of the three key sectors, semiconductors and banks, are in need of more repair. And the transports are no prize either yet. High yield bonds saw more weakness than they should have, causing some pain in our strategy, and they too, look like they need to stabilize before trying to rally.

It’s not my strategy to try and protect against 5% or less declines. I tend to ride them out which is why I may sound a little cavalier right now. That is, until the market proves me wrong and forces my hand. At this point, it looks like any new high seen quickly will lead to a larger than 5% decline and one I will take against. Further weakness from here should complete the decline and set the stage for a better rally.

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First “Key” Day of 2015

It’s only the second trading day of 2015, but I am going to get a little dramatic and say for the short-term, it’s somewhat of a key day. The second trading day of the year is seasonally a very strong one. Given the 1%+ down day to end 2014, there is a trend to see significant strength during the first week of the New Year to counter that unusual down day. Today is also the end of what many refer to as the Santa Claus Rally.

Overnight, the futures point to a red opening which is something I like to see when I am looking for a rally. Let stocks open mildly lower and give the bulls a chance to gather steam throughout the afternoon. Sector leadership and rotation are typically all over the map this week so it’s definitely worth paying close attention here.

If the bulls don’t get their act together shortly, stocks are probably looking at what they saw last year, a 5-9% pullback from where a better low can be formed. But that’s getting ahead of ourselves.

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This is it. Three more trading days and 2014 will be in the books as they say. Just 8 trading days ago, the bears were beating their chests yet again about how the bull market ended or the stock market was in 10%+ correction or a whole host of other nonsense. I wrote it right at the October bottom and I did the same thing 8 days ago; the bull market is old yet alive and weakness should be bought right away. Don’t count out Ole Saint Nick! If you followed that advice you were instantly gratified.

Dow Industrials – All time highs

S&P 500 – All time highs

S&P 400 – All time highs

Russell 2000 – All time highs

Reread that last one. Russell 2000 all time highs. The index that was left for dead by all the bears. Where are all those naysayers now? Awfully silent!

The only major index still waiting to celebrate the New Year at a fresh high is the Nasdaq 100. The odds do favor this laggard stepping up over the coming weeks to join its cousins.

Year after year, I have written about the many crosscurrents this time of year to go along with some very powerful trends. Are they perfect? Not even close. Do they win 9 out of 10 years? Nope. But they do provide a much better than average result when followed properly.

Interestingly and uncharacteristically, we don’t really have a standout leader index since the December bottom. All of the major indices have basically seen returns in the same range, something I do not expect to continue. I am sure you are now wondering if I think everything is hunky dory and we should just mortgage the house and go all in to stocks. Absolutely not. The time to do that was in October or last January or many other short-term bouts of weakness since 2012.

As I wrote about over and over and over during the fourth quarter, it is beyond unusual to see a major peak late in the year, especially during an uptrend. There is little impetus to sell. And let’s not forget about the pension and mutual fund managers trailing their benchmark and in dire need to pay performance catch up.

But the calendar is turning this week and I do see some minor market cracks that need to be fixed. I don’t like that over the past three days stocks lost momentum during the afternoon and closed in the lower end of the daily range. I also want to see the high yield bond market regain its footing in the face of volatile energy prices.

This won’t be the last time I write this next comment. 2014 was hard to lose a lot of money and it was a tough year to make a lot of money. I don’t think we have the same landscape in 2015. Things are about to get really interesting…

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Santa Ain’t Messin’ Around

The stock market bottom this week wasn’t as pessimism laden as the one in October,  but it was certainly fun nonetheless! And just like I did in October, I gave readers a few days notice to prepare for the low. Frankly, this was easy.

While it was a slightly soft seasonal time, the market sold off a few percent more than it should have which is part of the reason the rebound has been so robust. December is a haven for strong trends and several collided this week with a focus on Wednesday, Fed day. It was Santa’s turn to propel the market and boy did he deliver with the S&P 500 just a whisker away from all time highs to close the week. Yes, you read that right, ALL TIME HIGHS.

It was only a few days ago when friends, colleagues and pundits were all telling me that the quant models were wrong; bull market was over and stocks were not going to rally like they usually do this time of year. I don’t know; the bears are the ones who look to be the wounded party.

In any case, it was a great three days for the bulls, but now comes the time where I really want to see the Dow, S&P 400, Russell 2000 and Nasdaq 100 step up and grab new highs. If we fast forward to January and these indices are still lagging, I will certainly become concerned.

It was also good to see the high yield (junk) bond sector turn on a dime and take off. This group is vital to the long-term success of the bull market.

On the sector front, the news is less robust with plenty of sectors still not leading like I would like to see. As with the major stock market indices, let’s give them into January to get themselves healthier. Earlier this month, I sold our position in the transportation sector when it stopped rallying as crude oil collapsed. That sector needs to repair itself. Today, I sold half of our long-term position in semiconductors as they went from strong leader to laggard.

Have a good weekend and be safe!

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Santa Claus is Starting to Call… Right on Time

Over the past few weeks as stocks declined I remained firm in my forecast that Santa Claus would pay the markets a visit as he typically does in bull markets. One by one, I heard from people why this year was different, why stocks are already in a bear market, why oil would consume the market. I targeted this week and early next for the low as history suggests and for the rally to begin. Yesterday was also a very strong trend based on the Fed meeting for stocks to rally. Given Wednesday’s very impressive showing, stocks should have seen the bottom.

How will I know if I am wrong? That’s the question I always want to answer before committing client capital which I did this week. In the short-term, stocks should not fall back over the coming few sessions below yesterday’s low. Stocks are supposed to follow through to the upside almost immediately, which I believe they will.

Tax loss selling should have ended and the energy stocks are the best group to confirm this. They look like they are beginning a good bounce into the New Year. Was it THE bottom or just a trading low? It’s too early to tell, but I favor the latter right now.

As I mentioned before, more than 80% of portfolio managers are trailing their benchmarks this year which is why I did not believe the market could experience a large decline into year-end. Managers would use any pullback to commit cash and try and play the catch up game. The recent pullback gave them plenty of opportunities although I doubt they went all in, at least  not yet. Continuation of yesterday’s rally will likely force their hands at higher prices and further fuel the market higher.

We’ll see what today and tomorrow brings for stocks, but stocks are off to a good start thanks to Janet Yellen and the Fed.

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Santa Claus Rally Just Around Corner

Big picture. Late October through mid January is the strongest seasonal period to invest in stocks. That’s fact.

Over a similar but slightly different period, the semiconductors are the strongest group to invest in. Just since the October bottom, they are up 27% and I am very glad we own them in our sector program. They made up for some crummy positions we have held during the same time.

Early December shows some slightly negative seasonal headwinds, like we are seeing now. In bull markets, these headwinds usually turn to tailwinds over the coming week.

The much maligned and beaten down Russell 2000 index of small cap stocks has its most favorable period right now through early January, one of the “January Effects”. Tuesday’s wide daily range in the Russell turned the index from breakdown mode to possible breakout mode next week or the week after.

The traditional year-end or Santa Claus rally often seen in bull markets is set up to begin shortly and take the Dow above my longstanding target of 18,000 with the likelihood that small and micro cap stocks finally show some outperformance in an otherwise crummy year for them. I would be concerned and question that scenario if the Russell 2000 closed below Tuesday’s low, roughly 2.5% lower from here.

There are always many crosscurrents in December and this year is no different with most of the market doing well, while the energy sector is under severe pressure. Tax loss selling in energy stocks is supposed to wrap shortly and that group should see at least a reflex rally, regardless of where it is going next year. At the same time, with so many portfolio managers trailing their benchmarks, it’s very difficult for the bears to make any headway until next year. Any 1-3% decline should be quickly gobbled up, especially in the sectors and stocks that have performed the best in 2014.

Like I said, lots of crosscurrents through year-end…

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Feel is not Real

I have been playing golf for the better part of of 40+ years and I have taken my fair share of lessons. I can’t tell you how many times I have commented to my teacher that something “doesn’t feel right” or this “feels weird.” And each and every time the response has been the same; “feel is not real.” If you typically walk with a slight hunch, try walking really tall to understand what I mean. It feels funny, but barely noticeable to the eye.

As you know, I have been an unabashed bull for the past few years and that’s not changing now. I remain positive into 2015 with the chance for much higher prices next year. Over the past few weeks, it certainly “feels” like stocks have seen fresh all-time highs day after day after day. After all, stocks haven’t experienced more than a day’s hiccup since the bottom in mid October.

However, similar to what I mentioned about my golf swing, “feel” may not be real in the market right now. While the Dow Industrials have closed at fresh all-time highs three out of the last four days, the S&P 500, S&P 400, Russell 2000 and Nasdaq 100 have not matched the Dow’s short-term strength. They have been laboring along.

Seasonally, the period from late October through mid January is the most bullish time of the year to be invested, but on a smaller scale, early December has seen a few small potholes. Couple all that with a very solid employment report but tepid market response on Friday and you have a stock market looking a wee bit tired and in need of a little nap.

The healthiest and most bullish response would see the market do nothing for a days or so (essentially staying within a few percent of here) and then gear up for the traditional year-end (Santa Claus) rally. At the same time, we should see tax loss selling, the selling of losing positions for tax purposes like energy, begin to subside.

So while December always offers lots of crosscurrents in the markets, it’s almost always resolves itself to the upside to close the year. And to give the bears their fair share, should they mount an attack that lasts into year-end or the New Year, that would be a complete and total change of character for stocks and cause me to rethink my positive stance.

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