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Tis the season for a stock market rally as year-end is rapidly approaching and with it the possibility of a Santa Claus rally for stocks.
But as I pointed out in a recent Money and Markets article, a year-end rally can be difficult to time. Plus, there are a number of red-flags flying right now that could signal an un-Happy New Year for investors. Let’s take a closer look.
First, as you can see in the graph below, December has indeed been one of the most wonderful times of the year … to be invested in stocks.
Based on the historical record since 1928, December is the second-best month for S&P 500 performance, up 75% of the time while posting an average gain of 1.4% for the month.
Using history as a guide, you can expect a bit of turbulence this week, perhaps carrying into next week’s pivotal Federal Reserve meeting Tuesday and Wednesday.
Make no mistake that the Fed could be a wild-card this holiday season.
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Fed funds futures now point to a 79% chance of a rate hike on Dec. 16, the first since 2006, so you can expect plenty of volatility both leading up to, and after, the Fed’s decision.
But if stocks continue to follow the historical trend, you can expect a year-end rally to start around mid-December. Here comes Santa Claus!
What worries me is that the stock market could face a
New Year’s hangover; here’s why …
In a previous article I pointed out that market breadth has been deteriorating in recent months. And, unfortunately, breadth has gone from bad to worse in recent weeks.
You can see above that the New York Stock Exchange Advance-Decline line has been stuck in a downtrend since May with no sign of a letup. This means fewer and fewer stocks are leading the market indexes higher, a troubling sign.
In fact, just a handful of stocks including Google, Amazon and Netflix are responsible for a big chunk of the gain in the S&P 500 since the August low. Even worse, just six stocks account for more than half the gain in the Nasdaq 100 Index since August. That’s simply not sustainable.
If Amazon stumbles this shopping season, look out below!
Even more alarming, as I pointed out in my earlier article, credit stress is on the rise in financial markets. My colleague Mike Larson has done a great job of covering this story, so I won’t go into all the gory details. But the chart below gives you the whole sordid story in a single snapshot.
It shows the S&P 500 (top) and the Bloomberg U.S. Financial Conditions Index (bottom). As you can see, the financial climate has been deteriorating since mid-2014!
Notice the big spike lower in August. That coincided with a 1,000-point plunge in the Dow in just five days!
True, financial conditions did improve somewhat in September as the stock market rebounded, but the Financial Conditions Index is still locked in an unmistakable downtrend. Why?
Even while stocks rallied, bond market conditions got worse.
In fact, the SPDR Barclays High Yield Bond Index ETF (JNK) just plunged to multi-year lows this week, even while stocks are a stone’s throw away from setting new highs.
The last time junk bonds sold at such distressed levels was the fourth quarter of 2011, and the S&P 500 Index plunged nearly 20% at that time.
Bottom line: Something’s got to give. Even though seasonality points to higher stock prices in the weeks to come, several red flags keep warning of trouble ahead, perhaps in January.
In the meantime, keep a watchful eye on stock market internals (advancing vs. declining stocks, new highs vs. new lows, etc.) and credit markets (financial stress, junk bond spreads, etc.). If we don’t see an improvement soon, it could be an unhappy New Year for stocks.
Good investing,
Mike Burnick
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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 6 comments }
finland has announced that is considering giving all of its citizens a monthly cash stipend of 800 euros (around $865). a sure sign of trouble in the euro zone. now imagine what it must be like in venesualia, nigeria, iran, russia and the like. we americans should appreciate our good fortune, especially if we see a santa rally.
If your rally starts mid Dec. what is your strategy for Ultimate Stock Options with SPXU QID.
Do you think the Fed will chicken out again? How can they raise rates here when other parts of the world are still offering more stimulus? ….Cleanest dirty shirt?….maybe….but we ain’t all that clean either!
And once they do raise rates, they’ll try to sell us the idea that it’s because the “economy is improving,” which couldn’t be farther from the real truth…. IF there IS improvement, it’s simply a head-fake, all based on artificial money that’s been pumped into the system.
There are STILL a LOT of empty store-fronts where there used to be businesses around here!
i think they’ll raise the rate next week. nobody wants to believe it, but we’re at full employment. the fed needs to begin the process of slowing the economy so the long rate doesn’t rise too fast. with so many people working now, rates are going to rise irrespective of what the fed does next week.
WHATEVER HAPPENS~ HAPPENS!
*But Please~ Simply Just Remember* To~ “REMAIN HAPPY!”
*
LOVE*
Da!!!
Should we be buying anything right now, or just sit tight?