Market Outlook
The Santa Claus rally has begun a week earlier than normal when
the Dow Jones Industrial Average gained more than 700 points in three days and
the S&P 500 Index rallied 5%. That’s almost, but not quite, back to where
it was when the sell-off started nearly two weeks ago. The Christmas present
from the Fed was Wednesday’s announcement by the rate-setting Federal Open
Market Committee that it can be “patient” in deciding when to start raising
interest rates again was followed by a press conference in which Yellen said
the Fed would not raise rates until after “a couple of meetings” in 2015.
U.S. stocks extended gains for a third session this past
Friday, giving the S&P 500 its best weekly performance in nearly two months
as energy shares continued to rebound. The S&P energy index jumped 3.1
percent, leading the benchmark index's advance, and closed out the week with a
9.7 percent gain, its biggest weekly increase since December 2011. The
benchmark S&P 500 has gained 5 percent over the three sessions, bouncing
back quickly from recent losses sparked by a selloff in oil prices. For the
week, the Dow gained 3 percent, the S&P 500 rose 3.4 percent and the Nasdaq
climbed 2.4 percent with the S&P 500 rising to within a few points of its
closing record high. The index has gained 5 percent since Wednesday for its
best three-day stretch since 2011. As we head into year-end, treasury bonds
continue to be the top performer as this asset class has been in a bullish
trend all year basically unabated.
Investor Analysis
Recently we noted “…in
recent years, the market has been prone to early-December weakness…On average
the DJIA, S&P 500 and NASDAQ tend to drift lower until reaching their
respective December lows sometime mid-month…From that point on they briskly
rally into yearend…The sharp slide in the stock market this week also has the
major averages nearing technical support…look for the market to bottom next
week, possibly Monday, followed by a strong up day and then a nice rally to
wrap up the year…” The December seasonal pattern performed as
advertised with the major indexes generating the best weekly gain in months.
Officially the so-called “Santa Claus Rally” is the seven-trading day period
begins on the open on December 24 and ends with the close of trading on January
5. Normally, the S&P 500 posts an average gain of 1.5%. The failure of
stocks to rally during this time tends to precede bear markets or times when
stocks could be purchased at lower prices later in the year.
As the fourth quarter winds to an end Real Estate remains
the top performing asset class. But other sectors that are coming on strong
such as the small cap Russell 2000 and DOW Transports signal that investors are
confident about future economic performance. Particularly the Russell 2000 is
considered a bellwether for near term direction on where the market is headed. Last
week’s comment “…Next week is critical
for determining market momentum heading into the end of the year and kicking
off 2015. Prior to this past week, the major indexes had not suffered a weekly
loss in almost two months. Next week is the final expiration week of the year
for regular options and is a triple-witching week when contracts for stock
index futures, stock index options and stock options all expire on Friday. The
markets usually experience elevated volatility during triple-witching week and
if this follows last week’s volatility surge the probability for stocks to end
the year higher is lessened…” Triple-witching week was big for the stock
market with the best weekly performance in a long time for the major indexes.
Holiday week is normally a slow trading week and you can expect the market to
consolidate at its current highs. The best strategy is to purchase shares in
the top performing S&P sectors below because these stocks will continue to
lead as the market moves higher.
By Gregory Clay
Investment Strategist
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