The S&P 500 Futures and the Shortened Holiday Week

The index markets turned sharply higher last week despite the terror attacks in Paris. Stocks finally woke up to the idea of a December rate hike when the October Fed minutes showed a path to start raising interest rates in December. This combined with the November options expiration, plus some strong earnings from the retailers, and Mario Draghi saying the ECB will deploy extensive stimulus measures to combat low inflation indicating more easing in December, all helped to contribute to a week long rally that saw very few pull backs. On Friday’s close, the S&P 500 futures (ESZ15:CME) closed 9.5 points higher of +0.44%, up over 3% for the week, and it largest weekly gain since December 19, 2014. The Dow Jones futures closed up 94 point to 18701.00, up +0.44% ending the week with a gain of 3.4%, the Dow futures largest gain since October 9. The Nasdaq futures closed up 29.5 points on Friday, or up 0.64%, for a weekly gain over 3.4% and its largest gain since July 17.

THIN TO WIN TAKES OVER

The markets were already trending lower when the news of the French attacks hit the wires. As we noted early last week, the S&P made an event driven low, and as volume dropped, the ESZ15 started going back up. Below is a table of the ESZ15 over the last 8 sessions.

While we already know the shortened Thanksgiving Holiday week has some bullish tendencies, we want to start looking to the end of the month, and some of December’s historically bullish tendencies. Over the last 25 plus years I have always paid attention to how the markets tend to start moving higher going into the best 6 months for stocks (November to April). This year the pull back started in late July and eclipsed on the downside on Monday August 24th. Subsequently, there have been a series of major ‘higher lows’. These lows have helped set up the current rally, and looks like it’s going to continue right into December. As traders, we need all the tools we can employ, and clearly the year end stats are helping move the market higher. According to the Stock Trader’s Almanac there are several things to think about in December.

December is the number one S&P 500 month and the second best month on the Dow Jones Industrials since 1950, averaging gains of 1.7% on each index. It’s also the top Russell 2000 (1979) month and second best for NASDAQ (1971) and Russell 1000 (1979). Rarely does the market fall precipitously in December. When it does it is usually a turning point in the market—near a top or bottom. If the market has experienced fantastic gains leading up to December, stocks can pullback.

In pre-election years, December’s overall ranking remains about the same across the board however, average gains improve handsomely. DJIA averages 3.0%, S&P 500 3.2%, NASDAQ 4.9%, Russell 1000 3.5% and Russell 2000 4.0%.

Trading in December is holiday inspired and fueled by a buying bias throughout the month. However, the first part of the month tends to be weaker as tax-loss selling and yearend portfolio restructuring begins. Regardless, December is laden with market seasonality and important events.

Small caps tend to start to outperform larger caps near the middle of the month (early January Effect) and our “Free Lunch” strategy is served from the offerings of stocks making new 52-week lows on Triple-Witching Friday. An Almanac Investor Alert will be sent prior to the open on December 21 containing “Free Lunch” stock selections. The “Santa Claus Rally” begins on the open on Christmas Eve day and lasts until the second trading day of 2016. Average S&P 500 gains over this seven trading-day range since 1969 are an impressive 1.5%.

This is the first indicator for the market in the New Year. Years when the Santa Claus Rally (SCR) has failed to materialize are often flat or down. The last four times SCR (the last five trading days of the year and the first two trading days of the New Year) has not occurred were followed by two flat years (1994 and 2004) and two nasty bear markets in 2000 and 2008. As Yale Hirsch’s now famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”

December Triple Witching Week is more favorable to the S&P 500 with Monday up ten of the last fifteen years while Triple-Witching Friday is up twenty-four of the last thirty-three years with an average 0.4% gain. The entire week has logged gains twenty-five times in the last thirty-one years. The week after December Triple Witching is the best of all weeks after Triple Witching for DJIA and is the only one with a clearly bullish bias, advancing in twenty-three of the last thirty-three years. Small caps shine especially bright with a string of bullish days that runs from December 17 to 28.

Trading the day before and the day after Christmas is generally bullish across the board with the greatest gains coming from the day before (DJIA up seven of the last eight). On the last trading day of the year, NASDAQ has been down in twelve of the last fifteen years after having been up twenty-nine years in a row from 1971 to 1999. DJIA, S&P 500, and Russell 1000 have also been struggling recently and exhibit a bearish bias over the last twenty-one years. Russell 2000’s record very closely resembles NASDAQ, gains every year from 1979 to 1999 and only four advances since.

In Asia 6 out of 11 markets closed higher (Hang Seng -0.39%), and in Europe 8 out of 12 markets are trading lower (DAX -0.14%). This week’s economic calendar includes 19 separate economic reports, 10 T-bill or T-bond auctions or announcements, the markets are closed Thursday for the Thanksgiving holiday, and close at 12:00 on Friday. Today’s economic calendar includes the Chicago Fed National Activity Index, PMI Manufacturing Index, and earnings from Gamestop Corp (GME), and Tyson Foods Inc (TSN).

Resilience

Our View: Funny, the ESZ didn’t act all that great, but it still closed up 9.5 handles. The ESZ is now up 250+ handles from its Aug 24th, 1831 low, up 225+ handles from the Sept 29th, 1861 retest, and up 90 handles from last Sunday, Nov. 15th, 1998.50 Globex low. The key word in all this is resilience.

According to the S&P cash study for the November options expiration, the Monday after the Nov. expiration has been up 15 / down 16 of the last 31 occasions. Our feeling is that the S&P pulls back early in the week and then starts moving up into the holiday stats. If you look at this week’s economic  calendar,  http://www.bloomberg.com/markets/economic-calendar, they pack a lot of economic reports into the first three days of the week, so it could be busy. Our view is we lean to selling the early rallies and buying weakness but we will be paying close attention to the volume. Mondays tend to start out the week slow, and if the volumes are low, ESZ 2100.00 and higher is very possible.

See all of the November expiration stats here…

As always; please use protective buy and sell stops when trading futures and options.   

• In Asia 6 out of 11 markets closed higher : Shanghai Comp. -0.56%, Hang Seng -0.39%, Nikkei (closed).
• In Europe 8 out of 12 markets are trading lower : CAC -0.62%, DAX -0.20%, FTSE -0.36% at 6:00am CT
• Fair Value: S&P -2.74, NASDAQ -1.75, Dow -33.85
• Total Volume: 1.27mil ESZ and 4.1k SPZ

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