Wednesday, December 16, 2015
Here comes a Rip Your Face Off-Type Rally
I suspect much of this year’s first-half-December weakness was the result of heavier than usual tax-loss-selling pressure and Fed rate jitters.
Raymond James chief investment strategist Jeffrey Saut said that “the market has the potential for a rip your face off-type rally! It’s human nature to read into negativity, what happened last Friday, but it really doesn’t deconstruct the bullish case right here. You’ve got massively oversold conditions in the equity markets. You’ve got a December’s option expiration in the trillion plus dollars that everybody is worried about – it typically has a bullish tilt to it…. The setup is pretty good for a rally to the upside that's going to surprise a lot of people. I think you could make new highs by the end of the year – new all-time highs.”
Typical first-half-of-December weakness was a bit magnified this year. The lackluster performance of the stock market this year, Fed-rate-hike handicapping, new lows in crude, and a mini-run on junk bonds all exacerbate normal yearend tax-loss selling. But this appears to be setting the market up for a yearend Santa Claus Rally.
The Santa Claus Rally is a very important signal as to what to expect in 2016. Yale Hirsch defined the Santa Claus Rally in 1972 as a seven-trading-day period that spans the last 5 trading days of the year and the first two of the New Year. If the Santa Claus Rally does not happen stock markets are usually negative, flat or suffered a bear market.
The other reason the Santa Claus Rally is so important is that it helps drive up beaten down bargain stocks.
Investors tend to get rid of their losers near year-end for tax purposes, often hammering these stocks down to bargain levels. And this year is a pretty good example. Over the years the NYSE stocks selling at their lows on December 15 will usually outperform the market by February 15 of the following year.
If it does not transpire it is not a great sign for 2016. Stay tuned!