Weak Close to 2017 Indicates Bounce to Begin 2018

Back to work. Lots going on. Many crosscurrents. I hope you had a safe and enjoyable New Year’s celebration. I am still thawing out from so many days in Vermont without seeing the thermometer get above 0. The stock market begins the new week, month, quarter and year with a rather disappointing close to 2017. It has been something on my radar screen for a few weeks as recent history has not been kind to the bulls over the last five days of the year. The S&P 500 needs to gain 11 points over the next two sessions to avoid triggering a failure in the Santa Claus Rally which I wrote about HERE.

Favoring the bulls on Tuesday is a trend which is active because the last day of the month closed lower, but the month was still higher. It has a high degree of accuracy. Additionally, the last week of the year was down in an otherwise up month and year which puts the market in a position to bounce to begin the New Year. During this bounce, the NASDAQ 100 is the odds on favorite index to lead higher.

Working against the bulls is that all five major stock market indices put in somewhat ugly reversal days, meaning they began the day at their highs in positive territory, but ended it at the lows in negative territory. All four key sectors followed suit to the negative.

High yield bonds bucked the trend to finish higher although they have been lagging and under pressure for the past two months. Crude oil, gold and other commodities also continued their uptrends and it will be interesting to see if they can hold ground. Finally, the Euro is at a crossroad and the currency may hold the key to what we see in equities over the coming few weeks.

Lots going on. More than any other time of the year.

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Where is Santa Claus?!?!

Last week, I wrote about the much heralded Santa Claus Rally and last five trading days of the year. If you weren’t able to read the piece, I think it’s a good unbiased analysis debunking the notion that this time of year is like shooting fish in a barrel. With 2012, 2014, 2015 and 2016 all limping in to close the year, the trend has really been quite the opposite. So far in 2017, Santa has barely been seen with but one day left in the year.

Now before you conclude that the bears have been in control lately, the Dow, S&P 500, S&P 400 and Russell 2000 have all basically gone sideways of late with the NASDAQ being the weakest index, down marginally. It still seems like the bulls should resolve this little range with an early 2018 upside breakout next week. Banks, transports and discretionary all look like they want to run higher into January while semis have really disappointed and have me questioning whether their leadership has ended for a while.

High yields bonds, which have rallied of late, are still well below their Q4 all-time high peak. That’s my biggest domestic concern heading into 2018. However, the NYSE A/D Line continues to make all-time highs which should forestall any bear market or full fledged correction for the foreseeable future.

Currencies have been unusually quiet for this time of year, but that’s one asset class where I see fireworks in 2018 as the massive capital flows into the US I have mentioned for years should finally come to fruition. At the same time, while commodities have rallied this quarter, I see that asset class as having much more upside potential with crude well on its way to my $100 target over the next few years.

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Debunking Santa & the Last 5 Days of the Year’s Bullishness

Here it is; the last five days of trading for 2017. So far, it’s been the least volatile year in history. And barring any truly unspeakable geopolitical event, it will end that way as well. The stock market hasn’t seen even a 5% decline, let alone any full fledged correction. Those most rewarded were the ones who did absolutely nothing all year, similar to 1995. I don’t think 2018 will be a repeat, but that’s a story for a different day.

You may be hearing about the Santa Claus Rally (SCR) now. People define it all different ways or they just leave it nebulous so they can spin the result to fit their thesis. 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. While that was certainly the case years ago, recent history since 2001 shows a significantly muted trend and I wonder if this trend has been fully diluted because of computerized trading, the proliferation of ETFs or even decimalization.

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 sure proponents of this trend would point to the 15% summer decline as evidence that it “worked”. In 2015, Santa was a no show and stocks were in in the midst of a 15% correction which bottomed on January 20, 2016. How would they score that?

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.

As stocks enter the final 5 days of 2017, most pundits have been spewing that it’s a “lay up” or “easy money” for stocks to continue higher into year-end because it’s “always” happens. The data do not support that, especially of late with 2016, 2015, 2014 and 2012 all down fractionally on the S&P 500. And let’s face it, stocks do look a little tired. The S&P 500 hasn’t closed above its opening price for more than a week.

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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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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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Ho Ho Ho! Santa Bernanke Arrived

Greetings from usually cold and snowy, but recently tropical and wet Vermont! After three days of skiing in the rain, Old Man Winter came back and cut the temps by 70%! From short sleeve shirts and a light jacket, I am gearing up in full winter weather garb for wind chills around 0 today on top.

Ben Bernanke did it! The master. The maestro. He saw the downside of announcing a taper to their $85B a month in asset purchases, but felt strongly it needed to be done. As much as I really like and admire him, I respectfully disagree. Anyway, the man who has threaded needle after needle after needle threaded his final one last week and it was picture perfect, another beaut!

With enough hawks on the committee to push for the taper, Bernanke gave them what they wanted but also prevented the very nasty negative market reaction so many feared by pushing off the raising of rates farther into the future. It was genius and after a few minutes, the markets celebrated in a huge way with the celebration still ongoing. The Fed’s move also solidified a trend that I and many others have spoken about for some time, the strength of statement day in the stock market. With some qualifiers, it’s been like shooting fish in a barrel, the proverbial layup in trading.

Fed statement day last week also kicked off the traditional Santa Claus Rally. I have done an incredible amount of research in my 25 years in the business, but as I think about it, none more in the seasonal department than December and early January trends. And I know I am far from alone. To date, the stock market has pretty much followed historical patterns that included a mild early December decline to a mid December low from which the year-end rally launches to the most seasonally positive time of the year.

Bernanke may be given the credit (or not), but stocks are in the midst of the Santa Claus Rally that is supposed to last into the New Year. That doesn’t mean that every single day will be up! Depending on when you begin your study and which instrument you use, the positive seasonality can start anywhere from December 17 to the 24 and last until December 30 or through the first week of the New Year. On the flip side, as we recently saw in 2007 is that the famous adage usually works; If Santa Claus should fail to call, bears may come to Broad and Wall, meaning that if the traditional year-end rally does not occur, it is a warning sign to look closely at the market for winds of change.

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Even the Bears are Bulls… for Now

The stock market is tired, again. That seems like a phrase I have used often this year without much follow through. There have been many times in 2013 when the market had risen sharply and then looked just plain weary. Instead of correcting or even pulling back smartly, the stock market behaved like it does when it’s in a powerful bull trend; it’s consolidated sideways within a few percent of its high and then blasted off again.

“Is this time different?” That’s one of the scariest phrases in our business!

The only difference I see now with other 2013 overbought markets is that sentiment is now and has been at rally killing levels, something I mentioned on CNBC and Fox Business over the past few weeks as well as here and in Street$marts. If this was not early December, I would have much stronger conviction to be negative, but it’s almost unheard of to see a meaningful peak or significant decline at this time of the year. That’s tough to ignore. While I absolutely hate when people say they are “cautiously optimistic”, I will say that I am a nervous bull who is dancing very close to the door.

So here we are, during the most positive time of the year. Something like 8 of the last 10 Decembers have been up. Stocks are at all time highs. There is no impetus to sell. There are few downside catalysts. Even the bears are bullish until January. Yet all is not right. Today (December 2) and tomorrow are historically very good days in the market. Stocks opened well and moved higher into lunch, but then the bears tried to make another stand. This time, they were successful, closing the market just off the lows of the day and ending with a semi nasty looking candlestick on the daily chart.

If we do not see an immediate about face on Tuesday, the evidence will point to a sometimes typical early December pullback of 2-5% that should bottom within five days of option expiration on the 20th. Don’t forget there is a two day Fed meeting on the 17th & 18th where taper talk will be all the rage. What a great excuse for a low if the market sold off into that meeting!

While small caps and technology have led the rally for the past few weeks, it looks like they are trying to cede leadership to large and mid caps. IF there is a pullback and IF the small caps and tech underperform for a week or two or so, that would set up such a nice trade into January for buying the Russell 2000, S&P 600 and NASDAQ 100 for the final 5-10 days of the year. There is also a tendency for the semiconductor group, which leads tech, to perform poorly over the next two weeks. It would all fit together nicely.

But that is putting cart so far in front of the horse. Let’s wait and see what happens over the coming few days. There is no need to push and rush here as stocks are extended and tired regardless.

On a separate note, gold was bludgeoned today and is now set up to see sub $1200 sooner than later. Sentiment has been worse than awful, but even that hasn’t been able to thwart the bears. At some point it is going to matter, but that will likely be from lower levels on the metals and perhaps all time bearish levels of sentiment.

I hope you had a meaningful and fantastic Thanksgiving!

Happy Hanukah to those who celebrate!!

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Boehner Listened… Kinda, Sorta

John Boehner didn’t call me (he should have) and I doubt he reads my comments (he should), but at least the republicans figured out that their tactics were not working. They may not have unilaterally raised the debt ceiling long-term, but if the reports are accurate, they are going to offer a short-term raise in exchange for negotiations with the democrats on a variety of fiscal issues.

As you would imagine, the markets responded favorably although Europe led the way as the ECB and Bank of China announced the establishment of bilateral swap lines for the two currencies while we were all asleep.

I have been writing about the “whoosh” day to clean up this neat and orderly little pullback and after Wednesday’s intra-day recovery, it looks like we have at least a short-term rally on our hands. The super bullish case would have stocks going straight to all time highs from here which would really squeeze the bears who are not only positioned negatively for the nonsense in DC but also for a poor earnings season. The moderate case has the market rallying for a few days to a week and then revisiting Wednesday’s low by month end. From there, the year-end rally begins. The bearish case has this little rally ending shortly and then knifing through the recent lows and an elevator shaft style decline.

It’s too early to say which path the market will follow, but I am leaning towards the moderate one.

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