Our Lean — A Holiday Special

Today we get a look at the PPI number in the morning and later in the afternoon, it will be the last of the Fed meetings for 2023. I doubt the Fed is going to say anything we don’t already know, but the markets — or algos — will react to just about anything Powell has to say. The markets still look like they want to head higher, but we are also very overbought. 

After working with Jeff Hirsch for the last 20 years, I have learned a lot. 

Some people do their own thing, but if something that you were not using was saying the markets are going to scream higher, wouldn’t you want to know about it? I know I would. So who better to ask than Jeff himself, from the Stock Trader’s Almanac. 

I thought I would ask Jeff a few questions about the S&P. and where it’s going. Below are the questions and answers. 

Danny: With the S&P going up much over the last 6 weeks, everyone is bullish and looking to get long or add. As I recall, the Santa Claus rally tends to come late, is there any particular timing/days you would start buying to catch the year-end rip?

Jeff:

Get Ready for the Santa Claus Rally!

The Santa Claus Rally — or “SCR” — was devised by Yale Hirsch in 1972 and published in the 1973 Stock Trader’s Almanac. The “Santa Claus Rally” is the last 5 trading days of the year plus the first 2 of New Year. This year it begins on the open on December 22 and lasts until the second trading day of 2024. Average S&P 500 gains over this seven trading-day range since 1969 are a respectable 1.3%. It is not a trading strategy; it is an indicator. Years when Santa Claus Rally has failed to materialize are often flat/down. Down SCRs were followed by flat years in 1994, 2005 and 2015, two nasty bear markets in 2000 and 2008 and a mild bear that ended in February 2016. As Yale Hirsch’s now famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”

The January Barometer was also devised by Yale Hirsch in 1972 and published in the 1973 Stock Trader’s Almanac. It states that: “As The S&P 500 Goes in January, So Goes the Year.” There have been 12 major errors since 1950, which is an 83.6% accuracy ratio. Including 8 flat years yields a .726 batting average. The 1933 “Lame Duck” Amendment to the constitution is why the JB works. Since 1934, Congress convenes in the first week of January and includes those members newly elected the previous November. Inauguration Day was also moved up from March 4 to January 20.

Being the first month of the year, it’s when people readjust their portfolios, rethink their outlook for the coming year and try to make a fresh start. There is also an increase in cash that flows into the market in January, making market direction even more important. Then there is all the information Wall Street has to digest: The State of the Union Address in most years, FOMC meetings, 4th quarter GDP data, earnings, and the plethora of other economic and market data.

January Indicator Trifecta

We look forward to seeing Santa’s arrival and a positive Santa Claus Rally. Then we will be watching for a positive First Five Days and January Barometer, what refer to as our January Indicator Trifecta. Until the market says otherwise, we anticipate them all to be positive. But as we always remind readers: if these seasonal indicators are negative and the market does not rally as it normally does during these bullish seasons, we will likely shift to a less bullish posture – if not outright bearish.

Why is the Trifecta so important? Since 1950, when all three January Indicators, Santa Claus Rally, First Five Days and the full-month January Barometer are up, S&P 500 is up 90.3% of the time 28 out of 31 years for an average gain of 17.5%. When one or more of the Trifecta are down, the year is up only 59.5% of the time (25 of 42) for a paltry average gain of 2.9%.

Small Caps Heat Up

We will also be on the lookout for small-cap strength to begin around mid-December. What used to be known as the “January Effect” of small-cap outperformance can last from mid-December through March. Small caps, notably the Russell 2000 Index has been lagging and remains under water since its November 2021 high. However, since the October low the R2K looks like it’s bottoming and setting up for a more typical seasonal mid-December rally.

Seasonal Sector Trades

The energy sector and copper are both entering a bullish seasonal period and are technically set up well with fundamentals and the macro environment supporting taking positions. We have specific trading guidelines for select ETFs with specific buy limits, stop losses and auto-sell prices in our newsletter portfolio for subscribers. Get the 2024 Almanac as a free bonus when you subscribe or take out a 7-day trial.

Yearend 2023 and 2024 Outlook

For 2024, we are also bullish. Politics aside, a sitting president running for re-election is the most bullish of scenarios as you can see in the chart below which appears on page 11 of the 2024 Almanac. There is strong historical evidence that incumbent administrations do everything they can to stay in power.

When a sitting president is running for reelection S&P 500 averages a gain 12.8% in election years since 1949. This is substantially better than when there is an open field with no sitting president in office running, culminating in a loss of -1.5% on average for the year. The market hates uncertainty and with a sitting president running there is a good chance market, economic and civic conditions will likely remain unchanged whereas with an open field there are a great deal of unknowns. 2024 has that power of incumbency going for it.

We still don’t understand why so many on The Street are so bearish. It’s the holiday season. It is seasonally the most bullish time of the year. And seasonality remains on track and firing on all pistons as does the 4-Year Cycle. Market internals and technicals continue to be supportive. Those that may remember the 1990s will recall that the market can flourish, driven by innovation and technology – can you say AI? – even when interest rates are at current levels or even higher. The bond market continues to signal a declining trend in rates with the 10-year and 30-year bond yields retreating off the recent highs.

We see the uncertainty but remain bullish until the market signals otherwise. 2023 has been a nearly textbook pre-election year for S&P 500 and NASDAQ following the anticipated mid-term year 2022 bear. AI could be the innovation and driving force for market gains in 2024 and beyond just as indoor plumbing, the combustion engine, automobile, microprocessor, PC, internet, cellphone, etc., powered the market higher in previous secular bull markets.

We remain bullish for the rest of 2023 and expect a proper Santa Claus Rally. The prospects for the market in an election year with a sitting president running for reelection are bullish.

ES 

Levels from HandelStats.com

NQ