Monday, December 8, 2014

Prices Are Consolidating Before Rising Higher

Market Outlook
The Stock Trader’s Almanac reported over the course of this year, they compared 2014 to past midterm years and more specifically midterm years that were also sixth years of presidential terms. Whether you are a believer or not in seasonal patterns and analysis, it is difficult to ignore the fact that DJIA and S&P 500 have tracked the Sixth Years seasonal pattern rather well in 2014. January proved to be a tough month, but from the beginning of February into the third quarter, DJIA and S&P 500 both moved steadily higher just as they had both done in previous Sixth Years. However, rather than peaking early in the third quarter, they continued higher until mid-September before crumbling into mid-October. And from their October lows, DJIA and S&P 500 rocketed higher, just as the Sixth Year pattern does. Now the Sixth Year pattern is suggesting a brief period of consolidation before the market resumes its march higher into yearend. This pause is likely to last until mid-December and DJIA and S&P 500 could finish the month around 2% higher than they are currently trading.

Last week we said December is the number one S&P 500 month and second best for DJIA since 1950, averaging gains of 1.7% on each index. It’s also the top Russell 1000 and Russell 2000 (1979) month and second best for NASDAQ (1971). Rarely does the market fall precipitously in December. In midterm years, December’s rankings slip modestly, but average gains remain inline. The “January Effect” of small-cap outperformance starts early in mid-December. Wall Street’s only “Free Lunch” of distressed small- and micro-cap stocks making new 52-week lows on December Triple-Witching Friday will be served before the opening bell on December 22. Santa’s Rally begins on Wednesday December 24 and lasts until the second trading day of the New Year. S&P has averaged gains of 1.5% since 1969. In years when Santa Claus did not come to Wall Street, bear markets or sizable corrections have often materialized in the coming year.

As mentioned last week, investors are really enthusiastic about the U.S. economy as smaller capitalization indexes like the Russell 2000 and Midcap 400 continue to lead the stock market over their larger cap brethren. Even more telling is that Dow Transport and Real Estate are the hottest asset classes in the fourth-quarter as these sectors are dependent on domestic economy performance.
  


Investor Analysis
As displayed in the chart below, over the past thirty days cyclical and healthcare stocks are the leading S&P sectors. Historically, cyclical stocks begin picking up steam at this time of year and of course, healthcare shares benefit from Obamacare regulations forcing consumers to purchase health insurance. Energy stocks rebounded last week, but we need confirmation before betting this sector is starting to recover. Since we are beginning what is termed “the best six-months” of the trading year, now is a probably a good time to invest in shares of hot stocks in the best performing sectors.
  


By Gregory Clay
Investment Strategist

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