Daily Stock Market Articles

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.

 

Market Cap Less of a Factor In Performance
Fri, Nov 24, 2023

One trend investors have become used to over the last year is the outperformance of mega-cap stocks while seemingly every other stock in the S&P 500 struggles. In the four weeks since the October low on 10/27, though, there has been more uniformity in the gains.

The chart below breaks out the performance of S&P 500 stocks by decile with the largest stocks by market cap in decile one and the smallest in decile ten. Across the S&P 500, the average performance of stocks in the index is a gain of 9.5% since the 10/27 close, and no decile is outperforming the average gain by more than 1.7 percentage points. Yes, the decile of the largest stocks is outperforming every other decile (when you look at performance out to two decimal places), but there hasn’t been an overwhelming leader in terms of performance.



The charts below show the same analysis for mid (S&P 400) and small (S&P 600) cap stocks. For the S&P 400, while there is a wide disparity between performance across different deciles, outside of the smallest decile also being the decile with the worst average performance, there’s been no correlation between market cap and performance. Finally, in the small-cap space, there has been even less correlation between performance and market cap as three of the four worst-performing deciles are right in the middle of the pack when it comes to market cap (Deciles 4, 5, and 7). Are the days of simply buying the largest stocks and watching them trounce the rest of the market numbered?

 

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!

 

Flash PMIs Mixed
Fri, Nov 24, 2023

Predicting the direction of the US or global economy has always been a humbling profession, but doing it in the post-Covid economy where monetary and fiscal activity has gone into ‘Ludicrous’ mode only makes an impossible job even harder. The latest releases of global flash PMI readings for November from S&P Global only add to the already long list of examples. As discussed with the overseas releases in The Morning Lineup (link) earlier today, these indices make up about 85% of responses for the final PMI reading in a given month. As for the US, manufacturing activity, as measured by the PMIs, slipped back into contraction during November. Manufacturing PMI has now been at or below 50 for 12 of the last 13 months and the last 7 straight, and S&P Global noted that "demand conditions stagnated" at US factories. As for Services, activity beat and rose sequentially, marking the 10th straight month of expansion (a reading above 50).

As shown in the charts below, historically US PMIs have been a solid guide to global activity, explaining about 80% of the variation in global manufacturing and services activity. When we do the same analysis for the average across flash economies, we do even better as these readings explain 89% or more of the variation (0.89 for manufacturing and 0.94 for the services sector).



While the US readings and the average of the global flash readings have both done a good job as a guide to the global economy, their short-term moves in November were contradictory. In the charts below, we show the US, global, and an average of all the readings for economies that report flash PMIs. As shown, for both the manufacturing and services sectors, average flash data tends to be a pretty consistent guide to where global final data (green line) for a given month ends up and confirms the results from the chart above. For this month, though, in both the manufacturing and the services sectors, the direction of the US reading was in the opposite direction as the average flash readings of its global peers. This is hardly the first (or the last) time these readings will move in opposite directions on a month-to-month basis, but it doesn't help what is an already confusing environment to navigate.

 

Dallas Fed Still In Contraction
Mon, Nov 27, 2023

Economic data was light this morning, but both US releases were disappointing with new home sales and the Dallas Fed's reading on manufacturing activity coming in worse than expected. For the latter, the General Business Activity Index dropped to -19.9 from -19.2 the previous month. That was also 3.9 points below expectations.



With another negative reading, this headline index has now been in contraction for 19 straight months. That makes it the second-longest such streak on record (since 2004), surpassing the 18-month streak ending in June 2016. However, it would still need to last another six months to match the previous record streak of contractionary readings that occurred during the Global Financial Crisis.



Breadth in this month's report was terrible with only two indices - inventories and capital expenditures - moving higher on a sequential basis. To make matters worse, with further declines across a number of categories, just under half of them now find themselves in the bottom deciles of their respective historical ranges. Expectations are similarly depressed with only three categories rising on a month over month basis.



Formerly, production and capacity utilization were two of the few indices that remained in positive territory as of last month. But steep declines meant both indices tipped into contraction in November. While production is nearing its recent low from August, capacity utilization's enormous 15.5-point drop month over month was the largest one-month decline since June 2022 to leave the index at the lowest level since the spring of 2020. While the manufacturing sector has been weak for months, the now resolved auto strike didn't help matters, so it will be interesting to see if December's readings show any bounceback as workers come off the picket lines.



Readings on demand hit similar recent or post-pandemic lows. New orders have been in contraction since last June with this month's reading of 20.5 marginally above the low from one year ago. But the order growth rate is down to -25.4 which is the lowest since April and May of 2020. Even though new orders and the order growth rate are at post-pandemic lows, current readings are much higher than they were in the spring of 2020. However, that margin is not as wide for unfilled orders. The new low of -18.1 is only 8.4 points below the April 2020 low.



Prices have also seen an interesting dynamic recently. Prices Paid are well off the highs and have been falling in the past couple of months, but readings are still positive meaning prices for raw materials are rising at a slower pace than other points of the past couple of years. Prices Received, on the other hand, are not exactly showing manufacturers passing on those higher prices. With demand showing weakness, prices received are falling sharply as the index re-entered contraction in November. In fact, outside of the onset of the pandemic, it was the most negative reading since April 2016.

 

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.

 

December Opens Bearish in Midst of Most Bullish Season

In the now available, Stock Trader’s Almanac 2024, on page 90, it is shown that the first trading days of every month since September 1997 for DJIA have produced nearly 40% of the total gain. Greatest gains were produced by the first day of February followed by March and July. However December’s first trading day has not been as productive for DJIA or S&P 500. In the following table, the performance of the first trading day of December over the most recent 22 years is presented.

Aside from disastrous 2008, first trading day of December losses have been relatively mild for DJIA. The second worst loss, 1.34%, was 2021. Although the table has numerous years with 1% or greater gains, consistency is lacking. Since 2006, December’s first trading day has been weaker, down ten of the last seventeen for NASDAQ, down eleven of the last seventeen for DJIA, and twelve of sixteen for S&P 500.

With stocks taking a breather after the big rip off the October lows, early December weakness is likely in December 2023.

 

Why We Think Higher Rates Didn’t Crush the Economy


“The simplest solution is almost always the best.” -William of Ockham, better known as Occam’s Razor

One year ago, right now nearly all the economists on tv told us a recession was coming. Who can forget this headline from last October?

In many cases it wasn’t a question of ‘if’, but how bad it would be. The usual worries were tossed out. Things like M2, inverted yield curves, weak manufacturing survey data, and negative Leading Economic Indicators (LEI) all took the headlines. We’ve dispelled all of these worries the past year and fortunately, here we are a year later, and the economy is still humming along.

The other big worry was higher rates would crimple the consumer, which hasn’t happened yet and is what I want to discuss more today.

In the face of the most aggressive Fed in a generation, with yields soaring and mortgage rates exploding higher, the consumer’s situation in many cases improved. We’ve discussed before that a lot of this is because balance sheets for consumers are quite strong, thanks in part to record net wealth growth due to higher stock prices and home price.

Here’s a great chart from Carson’s VP, Global Macro Strategist Sonu Varghese showing just this. Overall liabilities are near where they’ve been the past few decades, yet assets and net worth have considerably improved. In other words, household balance sheets are in very good shape in many cases. This might surprise many investors given all we hear about are the negatives.



But now let’s tackle the question of how higher rates haven’t impacted the consumer more. Even the most bullish bull would likely expect 30% credit card rates, 8% mortgages, and other areas of huge jumps in rates to slow the consumer or even corporate America.

How was it possible that the consumer hasn’t slowed down at all? Go back and read the quote up top one more time. The simplest answer is likely the right answer according to Occam’s Razor. The simplest answer is consumers locked in debt at much lower rates and higher rates didn’t impact them nearly as much as many expected.

Here’s a great chart that was first shared by Michael Batnick on the Animal Spirits podcast last week. Side note, this is hands down one of my favorite podcasts and if you aren’t listening, then you should be. This chart showed that nearly 90% of all household debt was locked in heading into ’22, implying the huge jump in yields didn’t impact consumers as much.



Let’s now look at corporate America. It might have been dumb luck, but many large companies locked in debt at historically low rates back in ’21 and early ’22. So, the jump we’ve seen in yields did little to impact their overall businesses. This chart below was shared by Sam Ro, Founder of TKer, a while back and it showed that nearly half of all debt (ex financials) in the S&P 500 is locked in till after 2030. Wow. Maybe this is why the largest tech and communications names did so well this year?



Lastly, Blake Millard, Director of Investments, Sandbox Financial Partners, shared this chart recently and it showed how larger companies wouldn’t nearly be as impacted by higher rates, as 91% of debt for S&P 500 companies was a fixed rate at the end of last year. The flipside to this is smaller companies (using the Russell 2000) had only 51% of their debt at a fixed rate. Given small caps struggled mightily this year, it isn’t a surprise, as higher rates hampered them greatly. The good news though is we think the Fed is likely done hiking and this should mean yields could begin to trend lower, potentially a huge tailwind for small and midcaps stocks as the economy continues to grow.

 

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?

 

Continuing Claims Brutal Rise Continues
Thu, Nov 30, 2023

Initial jobless claims experienced a 22K drop last week (after a 2K upward revision this week), the largest one week decline since June 24th. Claims experienced a modest rebound in the most recent print rising back to 218K. At that level, claims are in the middle of the past couple of year's range which is also historically healthy relative to pre-pandemic readings.



Before seasonal adjustment, claims experienced an unusually large drop back below 200K. That is the first sub-200K print since the end of October. Additionally, it is a record low relative to the comparable week of the year throughout history. While that may sound like a positive, we'd be hesitant to begin shooting off confetti. That drop and low reading are more likely a function of the Thanksgiving holiday, and as shown below, this week's drop is only a dent to the seasonal rise in claims that is typical for this time of year. In other words, one week does not make a trend.



While the initial claims number is likely not trending in a more positive direction, the concerning climb in continuing claims has pressed on. Seasonally adjusted continuing claims have continued their rapid rise with a week-over-week increase in nine of the last ten weeks. That has resulted in a fresh two-year high of 1.927 million.

 

First Half December Weak Ahead of Mid-Month Pop

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. December’s first trading day has been bearish for S&P 500 and Russell 1000 over the last 21 years. A modest rally through the fifth or sixth trading day also has fizzled going into mid-month. It is around this point that holiday cheer tends to kick in and propel the indexes higher with a pause near month-end. Pre-election year Decembers follow a similar path, but with noticeably larger historical gains in the last third of the month.

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 email Issue will be sent prior to the market’s open on December 18 containing “Free Lunch” stock selections. The “Santa Claus Rally” 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%.

This is our 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 six 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 three flat years (1994, 2004 and 2015) and two nasty bear markets (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.”

 

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.