Thanksgiving to Santa Claus Rally Trade — Time to Feast Thanksgiving kicks off a run of solid bullish seasonal patterns. November-January is the year’s best consecutive 3-month span (2024 STA p 149). Then there’s the January Effect (2024 STA p 112 & 114) of small caps outperforming large caps in January, which begins in mid-December. And of course, the “Santa Claus Rally,” (2024 STA p 118) invented and named by Yale Hirsch in 1972 in the Almanac. Often confused with any Q4 rally, it is defined as the short, sweet rally that covers the last 5 trading days of the year and the first two trading days of the New Year. Yale also coined the phrase: “If Santa Claus should fail to call, bears may come to Broad and Wall.” We have combined these seasonal occurrences into a single trade: Buy the Tuesday before Thanksgiving and hold until the 2nd trading day of the New Year. Our good friend and renowned technician and options guru Larry McMillan of the Options Strategist opened our eyes to this trade and runs it with options starting on the day before Thanksgiving. Since 1950, S&P 500 is up 79.45% of the time from the Tuesday before Thanksgiving to the 2nd trading day of the year with an average gain of 2.57%. Russell 2000 is up 77.27% of the time since 1979, average gain 3.19%.
Six Reasons to Be Thankful “We do the worst possible thing at the worst possible time because we are most certain that we are right just when we are most likely to be wrong.” -Jason Zweig, writer at the Wall Street Journal As we look to finish up 2023 on a strong note, there are many reasons to be thankful as investors. Here are six reasons we would like to share. Stocks Are Having a Great Year The S&P 500 is up 17.6% for the year, a very solid year in the face of many worries and concerns. We came into this year overweight equities and said there would be no recession. It wasn’t a popular view and we got many funny looks (and even some stern calls for not understanding how bad it was out there), but fortunately, things have played out very close to how we expected. But what about all the worries you ask? Here’s the thing, all years have worries and concerns. One year ago, nearly every strategist and economist on TV was telling us the bear market wasn’t over and a recession was a near certainty. Go look at the quote from Jason at the top for a great way of understanding what happened. Fortunately they’ve all been wrong. It’s been a great year for stocks, which should have investors smiling and is a reason to be thankful. The Path Remains Higher for Stocks We remain overweight equities, as we continue to expect the economy to surprise to the upside next year and the bull market we’ve been in for 13 months now to continue. From a purely technical point of view, the trend is higher, potentially much higher. According to Point & Figure charting, the target on the S&P 500 is 5,300, which would be a gain of approximately 18% from here. Take note there is no time frame for hitting this, it is only a pure price target. Also realize that this isn’t the only reason we are bullish, but it is another nice building block supporting the bullish thesis. You can read more about Point & Figure charting from our friends at Investopedia here, but the bottom line is the trend has been higher and likely will continue to be. The Consumer Remains Healthy We’ve been hearing for two years now that the consumer was tapped out and the economy was headed for a recession. Many economists used things like yield curves, M2 money supply, Leading Economic Indicators (LEI), and credit markets to scare investors into thinking trouble was coming and the consumer was cracking. Well, the consumer has continued to surprise and we don’t think things will change anytime soon. Our economy is still adding approximately 200,000 jobs a month and real wages are reaching new highs, both great signs of consumer health. Yes, there are some small cracks potentially forming with delinquencies moving higher, but in many cases we are still well beneath pre-COVID levels. Think about it, how bad could things be when Ferrari is making an all-time high? Yes, clearly few people can afford one, but it is hard to see a global disaster coming when this stock is doing so well. We did also see a big jump in consumption last quarter. Remember, this took place as student loans and higher rates took hold. In fact, retail sales and food services are still running at 5% above pre-COVID trends, with no signs of slowing down. Fear Is Still Everywhere They say the stock market climbs a wall of worry, which is something it has undoubtedly done so far this year. We were on record in late October saying a major low was likely, as it was clear that overall sentiment had turned too bearish. Remember, once everyone who wants to sell has sold, it means that only buyers are left. The New York Fed surveys consumers monthly and in the October survey the mean probability of higher U.S. stock prices in a year was the lowest it had been all year! But that’s just a survey. Let’s look at the hard data of what investors really are doing. According to data from S&P Market Global, retail investors sold stocks last month like rarely before seen in history. Retail investors sold stocks to the tune of $15.6 billion in October, which was more than in October 2022 at the bottom of a vicious bear market. Unfortunately, this likely means many investors sold right as the market made another major low, but from a contrarian point of view, this is how lows form. Manufacturing Is Stronger Than Many Think We saw a manufacturing recession last year, but this year the hard data has been much better than much of the soft survey data has been saying. The truth is historically manufacturing tends to lead the economy and it isn’t a coincidence we just saw three consecutive negative earnings quarters year-over-year with manufacturing lagging overall. The good news is we are seeing signs manufacturing is bottoming and should begin to grow nicely next year. Here we show major surges in real manufacturing construction and high-tech construction spending. Yes, much of this is due to things like the CHIPS Act, which is incentivizing companies to bring semiconductors and other high-tech manufacturing back to the U.S. (called onshoring), but it is hard for us to consider this a negative event and likely it will lead to better productivity and economic growth down the road. The Year End Rally Is Alive and Well One of the amazing things about 2023 is how consistently it played out with history, from a strong first half, to a weak Q3, to a likely strong year-end rally. These are all what ‘the book’ said should happen. Well, we don’t officially know if we will have an end of year rally, but the S&P 500 is up more than 7% in November already and we are optimistic there could be more gains in store. This chart of previous years up more than 10% at their midpoint does a great job showing how this year has played out, and why more strength is possible before the New Year’s ball drops. Much to Be Thankful For As we’ve been trying our best to lay out for more than a year now, the positives for markets and the economy have outweighed the negatives this year. Yes, there are many concerns and the headlines are quite scary sometime. But for investors, it has been a good year and we see many reasons to think 2024 should be strong as well. We want to wish everyone a happy Thanksgiving week and hope you can get some rest, great food, and time with family and friends.
Happy Thanksgiving! 2023 YTD Winners Fri, Nov 24, 2023 The average Russell 3,000 (a combination of the large-cap Russell 1,000 and the small-cap Russell 2,000) stock is up just over 5% year-to-date on a total return basis. Below is a list of the best performing stocks in the index so far in 2023. All 28 stocks are up more than 200%. The problem with some of this year's big winners is that they're still down significantly from highs made a couple years ago. For example, below is a list of stocks that are up more than 100% this year but still down at least 25% over the last two years. If you managed to buy these names in early 2023, congrats. If you bought them towards the end of 2021, however, you're still not even close to getting back to even. To weed out this year's winners that are still in massive drawdowns, below is a list of stocks that are up more than 100% this year and also up more than 75% over the last two years. The list below contains the 27 stocks in the Russell 3,000 that fit this bill. As shown, Super Micro Computer (SMCI) is on top with a 249% gain in 2023 and a 583% gain over the last two years. Other names on the list that you might know include elf Beauty (ELF), Vita Coco (COCO), Abercrombie & Fitch (ANF), Duolingo (DUOL), and Builders FirstSource (BLDR). The rest of the names on the list are more than likely names you haven't read much about before. If you have some time over the long Thanksgiving weekend, though, give them a look!
Not Necessarily the Mega Caps and Everyone Else Mon, Nov 27, 2023 You would have to be living under a rock this year to not know that the performance of US stocks has been driven in large part by companies with the highest market caps. To illustrate it again, the chart below summarizes the YTD performance of stocks in the S&P 500 based on where their market caps stood at the beginning of the year. The first decile on the left in the chart contains the 50 stocks in the S&P with the largest market caps at the start of 2023, and so on and so forth until you get to the last decile which contains the 50 stocks in the index with the smallest market caps at the start of the year. As shown, the 50 stocks with the largest market caps at the beginning of the year are up an average of 18.2% YTD, and a lot more than any other of the nine deciles. In the S&P 500, this year has been all about the largest stocks and everybody else. With the largest stocks in the S&P 500 trouncing the rest of the index, we were curious to see if there was a similar dynamic at play among mid-cap stocks (S&P 400) and small-caps (S&P 600), and we were surprised to see the opposite trend at play. Starting with stocks in the S&P 400 Mid Cap index, the 40 largest stocks in that index are down an average of 0.3% YTD, and every other decile of stocks in that index is up YTD. In fact, the three deciles comprising the stocks with the smallest market caps at the start of the year are all up by double-digit percentages YTD. Some reports would have you believe that the mega-caps are the only area of the market that has rallied this year, but stocks in the decile of the smallest stocks in the S&P 400 are actually up more, on average, than the stocks that make up the 50 largest stocks in the S&P 500. Within the small-cap space, stock performance by market cap has been somewhat less correlated, although we would note that four of the six deciles with the largest stocks by market cap at the start of the year are down YTD. Meanwhile, deciles seven through ten, which are comprised of the 240 stocks in the index with the smallest market caps, are all up YTD.
Gold Closes in on New Highs Tue, Nov 28, 2023 In last night's Closer and today's Morning Lineup, we discussed areas in commodity markets that have been selling off. One that has avoided those declines has been gold. As shown below, gold's outperformance isn't exactly new. Gold relative to a broad basket of commodities massively outperformed early on in the pandemic, but that outperformance reversed up through the spring of 2022. The past year and a half has seen that outperformance generally return, especially over the past couple of months. Amidst that outperformance, the yellow metal has been rallying since its early October low having gained 11.5% since then. That brings the commodity back within 0.65% of its 52-week set in May and 0.77% below the all-time high from August 2020 (what had been the first all-time high in nearly a decade). However, since the 2020 high those levels have repeatedly acted as tough resistance.
Home Prices See Big Bounce Off 2023 Lows Tue, Nov 28, 2023 The latest S&P CoreLogic Case Shiller home price data for September was released today and showed a 0.3% month-over-month (m/m) increase in home prices at the national level. Fifteen of twenty cities saw prices rise m/m, with Detroit, New York, and Las Vegas jumping the most, and Minneapolis, Denver, Seattle, Dallas, and Portland seeing declines. Year-over-year, Detroit, San Diego, New York, and Chicago are up the most at 6%+, while three cities are down year-over-year: Portland, Phoenix, and Las Vegas. We highlight how these home price indices have changed over various time frames in the table below. Home prices have jumped significantly from their lows at the start of 2023. Each of the twenty cities tracked peaked at some point in 2022 and then pulled back and made a low in either January or February of this year. In the chart below, we show how much home prices have jumped in each region from their respective 2023 lows. San Diego and Detroit have seen home prices rally more than 10% already, while Chicago, Cleveland, and Boston are up 8%+. Below is a look at how much home prices are currently up since February 2020 right before COVID hit. As shown, the composite and national indices are up roughly 45% since COVID began, while Miami and Tampa -- two Florida cities -- are up the most at roughly 70%. On the other end of the spectrum, San Francisco, Minneapolis, DC, and Portland are up the least since February 2020 at 30-34%. Finally, below we show how much home prices are up in each city versus their peaks seen during the last housing bubble in the mid-2000s before the Financial Crisis. The national index is now up 69% from its prior housing bubble peak, while Dallas and Denver are up the most at 133% and 126%, respectively. Chicago, Las Vegas, and DC are the cities up the least versus their prior housing bubble peaks at 25% or less. Below is a look at historical pricing for the twenty Case Shiller cities and the three national indices. Cities in green are at all-time highs. After the mid-2000s housing bubble burst and prices collapsed following the Financial Crisis, many thought it would take generations to get back to the peak levels seen prior to the crash. Now those prior peaks look like mere bumps in the road after the surge we've seen for housing so far this decade.
Mega-Cap AI Mentions Explode Thanks to NVIDIA Thu, Nov 30, 2023 Now that NVIDIA (NVDA) has reported its Q3 numbers (the last of the mega-caps to report), below is an updated look at the number of times "AI" was mentioned during conference calls going back to 2021. The revolutionary ChatGPT app was released in November 2022, and since then, we've seen an explosion in "AI" mentions from mega-cap management teams. As shown below, "AI" was mentioned a total of 418 times this quarter across the conference calls of AAPL, AMZN, META, MSFT, GOOGL, and NVDA. The big jump from last quarter's 350 "AI" mentions was thanks to 154 mentions on NVDA's call alone! Apple (AAPL) remains the lone mega-cap that's hardly discussing "AI" at all on its calls with just nine mentions this quarter. Thus far, Apple has not jumped on the "AI" bandwagon at least when it comes to quarterly earnings conference calls. Amazon (AMZN), on the other hand, has picked up the "AI" pace with 48 mentions this quarter. In Q4 2022 just after ChatGPT's release, "AI" was mentioned just once on AMZN's eight prior quarterly calls. Meta (META) "AI" mentions ticked up even more on its latest call to 71, while Microsoft (MSFT) mentions went the opposite direction and fell from 76 to 61 quarter over quarter. Alphabet (GOOGL) mentions also dipped a bit but remained high at 75, ranking it second behind only NVIDIA for the most number of "AI" mentions in Q3. The bull market for stocks this year has coincided with a pullback in inflation, but it has also been driven in large part by mega-cap Tech stocks, that, except for AAPL, are now fully on board the AI wave. We've asked this question rhetorically several times this year, but once again, where would this market be without ChatGPT?
Let’s Talk About Santa and December “It’s not supposed to be easy. Anyone who finds it easy is stupid.” -Charlie Munger, Vice Chairman at Berkshire Hathaway Before we get into today’s blog, I wanted to take a second and give thanks to Charlie Munger, who passed away Tuesday, and all he has done to make this world a better place. There have been so many amazing tributes to an incredible man, I couldn’t possibly add anything new. I’ll just say this, he was unlike nearly anyone else and there never will be another one like him. Rest in peace, Charles Thomas Munger. Let’s now get into it and first things first. The best month of the year is sure living up to that name, as the S&P 500 is up more than 8% in November with one day to go, making this the best November since 2020 (10.8%) and 1980 before that. We wrote why we expected better times in November one month ago, but even we have to admit we are surprised by just how strong things have been. Looking ahead, December indeed is a strong month historically for stocks and we don’t expect this year to be any different. One month ago right now nearly everyone was bearish and the truth is many money managers have been drastically underweight stocks this year and they need to add to their positions, so we expect a lot of performance chasing into the end of the year. Should we see any early December weakness, we’d expect buyers to step in quickly. In fact, early December weakness isn’t out of the ordinary, it is later in the month when Santa tends to come. Speaking of Santa, you will hear a lot about the well-known Santa Claus Rally (SCR) very soon. This simply is when we tend to see stocks do well to end the year and it playfully is called the SCR. Here’s the catch. It isn’t the whole month, or from late November until year end. It is the last five days of the year and first two days of the following year. Believe me, I will write about it a lot later in December, but by the true definition of the SCR, it won’t happen for many more weeks. With Santa out of the way, let’s look at December in general and why we expect to see more gains before ’23 is over. First up, no month of the year is more likely to be higher, with stocks higher 74.0% of the time in the last month of the year. In fact, only once in history has December been the worst month of the year and that was in 2018 (we can thank the Fed for that policy mistake back then). Fortunately, the Fed is likely done hiking and we don’t expect to see a similar policy mistake this time around. December is actually the third best month on average at 1.4%, with only April and November better. But what stands out to us is pre-election years tend to see even more strength, up 2.9% on average, another reason to expect higher prices before the ball drops on New Year’s Eve. Here’s a chart we’ve shared all year that breaks down all 12 months based on various timeframes. Well, overall December is pretty solid, but it doesn’t rank very well if you look at only the past decade. But that is mainly due to the 9.2% drop in 2018 and the 5.9% drop last year. Here’s an interesting stat: Stocks haven’t been down more than 1% in December two years in a row since 1980 and 1981. Another reason to expect better times in December. Some more reasons we expect a strong end-of-year rally? We’ve shared this chart a lot lately (because it has played out nearly perfectly) and it showed that years that were up double digits at the middle of the year tended to see weakness around the third quarter, but a late October low and vicious rally to end the year. This has played out well so far and we expect it to continue in December. Speaking of the market being up a lot heading into December, we found that when the S&P 500 was up at least 10% for the year heading into December, the final month of the year has been higher 17 of the past 20 years and 12 of the past 13. Taking that a step further, if a pre-election year was higher by at least 10% going into the final month, the past five times December has been higher each time and up a very impressive 5.3% on average. What about if November was up a lot? One would think a big November might steal some gains from December, right? There’s some truth to that, as we found when November was up 5% or more then December was up only 0.6% on average. Lastly, we will leave you on this bigger picture bullish development. The S&P 500 has finished higher four consecutive weeks and gained more than 10% over the win streak. But what impressed me was each week gained at least 1%. In other words, there was persistent buying, not just one huge week and nothing outside that. So, I looked at previous times we saw a similar development and sure enough, the future returns have been quite impressive. The S&P 500 was higher a year later eight out of 10 times and up a median of 17.6%, which could have a lot of bulls smiling this time next year.
Bear's Unprecedented Drop Thu, Nov 30, 2023 November was a remarkable month for stocks, though equities have stalled out just below prior lows. That has not thwarted investor sentiment though. The latest sentiment survey from the AAII showed 48.8% of investors reported as bullish, up from 45.3% last week. That is now the highest reading on bullish sentiment since the first days of August, and is more than 10 percentage points above the historical average of 37.5%. While bullish sentiment has not yet moved above its prior highs, the share of respondents reporting as bearish has set a new low. The reading has experienced a dramatic shift having started November above 50%, and fallen all the way down to 19.6% this week. That is the lowest level of bearish sentiment since the first week of 2018! Perhaps even more impressive is that over 30 percentage point drop in the past four weeks ranks as one of the largest declines on record. Since the start of the survey in 1987, the current four week decline ranks as the fourth largest on record. The last occurrence was all the way back in April 2009. As a result of the massive drop in bears, the bull-bear spread has risen to 29.2, just shy of the July high of 29.9. The AAII survey was not alone in having seen a surge in optimism. For example, the Investors Intelligence survey likewise is seeing the strongest bullish sentiment since early August and the NAAIM Exposure Index is at the highest level since late July. Combining these readings into our sentiment composite shows the index is now at 0.95 indicating the average sentiment survey is now almost a full standard deviation above (meaning more bullish than) its historical average.
November Winners Fri, Dec 1, 2023 The average stock in the large-cap Russell 1,000 rose 9.77% in November, and 38 stocks gained more than 30%, 14 rallied more than 40%, and seven surged more than 50%. Below are the 30 stocks that rose the most in November. For each name, we also include its market cap, its year-to-date total return, its distance from its 52-week high, and short interest as a percentage of float. As shown, buy-now-pay-later company Affirm (AFRM) was up the most in November with a huge gain of 95.4%, followed by streaming company Roku (ROKU), crypto-trading platform Coinbase (COIN), and digital payments company Block (SQ). Are we back in late 2020/early 2021?? Other notables on the list of big winners include Gap (GPS) with a gain of 56.8%, Expedia (EXPE) at 42.9%, Generac (GNRC) at 39.25%, and Palantir (PLTR) at 35.47%. Below we've expanded the universe to show the top-performing stocks in the Russell 3,000 in November. The Russell 3,000 includes all the stocks in the large-cap Russell 1,000 and small-cap Russell 2,000. Four stocks in the Russell 3,000 rallied more than 100% in November: Rocky Brands (RCKY), Bluegreen Vacations (BVH), Sight Sciences (SGHT), and TransMedics (TMDX). Rocky Brands is a $210 million market cap retailer that sells heavy-duty boots and other apparel. Bluegreen Vacations is a timeshare company. Sight Sciences creates medical devices and procedures for the eyes. And finally, TransMedics makes unique medical devices built to care for organs during the transplant process. Before we go, below is a look at the stocks that have gained the most in market cap in 2023. Amazingly, twelve stocks have gained more than $100 billion in market cap this year, six have gained more than $500 billion, and one -- Microsoft (MSFT) -- has gained more than $1 trillion!
New Highs in 2024* Mon, Dec 4, 2023 The equity market (and most other parts of the financial universe) has been in rally mode for about five weeks now, and while it would be greedy to think that the S&P 500 could rally the 4% needed between now and year-end to get back to its prior highs from the start of 2022, on a total return basis, the market is knocking on the door of new all-time highs. As shown in the chart below, the total return index is within 1.1% of its prior all-time high from 1/3/22. In addition to nearing its prior highs, the pattern of the S&P 500 looks a lot like a cup and handle which technicians consider to be a bullish formation. For all the weakness that we've seen in the US Treasury market over the last couple of years, high-yield bonds have fared much better. As shown in the chart below, the iBoxx High Yield Total Return Index, which is the underlying index of the popular ETF (HYG), came into the week just 2.5% below its prior all-time high from 12/28/21. That's impressive in its own right, but even more noteworthy when you consider the fact that long-term Treasuries (20+ year maturities), long considered the 'safest' area of the fixed income sector, or all financial assets for that matter, are still down over 40% on a total return basis from their Summer 2020 peak.
Small Caps Heat Up Three weeks ago we gave you a heads up that it was Open Season for Small Caps. The Russell 2000 small cap index was beginning to rally off its new multi-year low at the end of October. Though it was still lagging big caps. Small caps are leading again today. But beware there still may be some chop as you can see here in the chart before small cap season officially opens mid-December.
