December Outlook: Tracking Historical Patterns and Seasonal Trends Bodes Well for Yearend Gains
By: Jeffrey A. Hirsch & Christopher Mistal
November 24, 2015
Market action over the past months has been quite in line with historical and seasonal trends. After our October 5 Best Six Months Seasonal MACD Buy Signal, a classic October turnaround rallied stocks to the sixth best October performance for the S&P 500 since 1930. November opened strong as usual the first two trading days then sold off through mid-month until the week before Thanksgiving. 
With last week’s gain the week before Thanksgiving is now up 18 of the past 23 years on DJIA. Last week’s 3.27% on the S&P 500 500 was its best weekly gain of 2015. However, November as a whole is currently quite flat as pre-election November’s tend to be, averaging 0.3% on the S&P versus the usual 1.5%. Small caps are also beginning to firm up as they tend to do this time of year.
Next month’s FOMC Meeting is arguably one of the most anticipated economic release events of all time. However, as we pointed out earlier this month, whether or not the Fed actually raises rates this time around is still an open discussion, but if they do, it would remove one large uncertainty that has held the market in check for the better part of a year. At which point, it would not be surprising to see the market make another run at record highs sometime in Q1 or early Q2 2016.
In addition to the Fed rate hike question, December packs its usual full docket of seasonal influences. Yearend tax-loss selling tends to create early month weakness, but unlike November, pre-election Decembers are much stronger on average, up 3.2% on the S&P since 1950 versus 1.7%. 
Around mid-December the so-called January Effect usually begins where small caps outperform large caps into Q1, though most of the gain takes place the last two weeks of the year. December’s Triple Witching Week and week after are the most bullish of them all with DJIA up 19 of the last 24 TWW and 17 of the last 24 weeks after. 
Triple witching Friday in December, when stock options, index options and index futures all expire the same day as they do every quarter is when we make our Free Lunch Bargain Stock Selections from the list of stocks making new 52-week lows. The list is compiled over the weekend and delivered to subscribers before Monday’s open. 
Finally, there is the vaunted Santa Claus Rally. Yale Hirsch defined the SCR in 1972 as seven-trading-day period that spans the last 5 trading days of the year and the first two of the New Year. The S&P has averaged 1.4% over the period. But, the real significance is when it does not appear. As we remind in the headline on page 114 of the 2016 Almanac, “If Santa Claus should fail to call, bears may come to Broad and Wall. In the table below you can see that the last four time SCR was negative the year was either flat or suffered a bear market. The S&P was down -3.0% on the S&P this year and 2015 is on pace for a flat year.
[Santa Claus Rally Table]
Pulse of the Market
Following six straight weeks of gains from the end of September to the beginning of November, DJIA and other major indices all took a break during the second week of November. DJIA’s retreat was significant enough to turn both the faster moving (1) and slower moving MACD indicators negative. However, the bout of weakness was short-lived as the usually bullish week before Thanksgiving lifted DJIA back above its 200-day moving average (2) and put both MACD indicators on the verge of issuing new buy confirmation signals.
Dow Jones Industrials & MACD Chart
Through last Friday, DJIA (3), S&P 500 (4) and NASDAQ (5) were up in seven of eight weeks. This weekly winning streak is very similar to last year at this time when DJIA and S&P 500 were up eight out of nine weeks to wrap up 2014. Last year’s streak started in mid-October and lasted until the last week of December. The only blemish occurred during the second week of trading in December which has become prime tax-loss-selling season. 
NYSE Weekly Advance, Decline, High and Low metrics have held up throughout the current rally. NYSE Weekly Advancers solidly outnumbered Decliners (6) last week as S&P 500 enjoyed its best weekly gain of 2015 (+3.27%). New NYSE Highs and Lows (7) are in a seesaw battle as major indices remain a few percentage points away from all-time highs. Should New NYSE Highs begin to expand meaningfully, new all-time highs could be around the next corner.
Weekly CBOE Put/Call Ratio (8) spiked to 0.91 during the week ending November 13. That was the highest reading since June 17, 2011. But, the market rebounded briskly the following week. At 0.75, CBOE Put/Call ratio is somewhat elevated. Again potentially worrisome for some and a positive sign for others as there seems to still be a healthy amount of skepticism surrounding the market recent moves.
Click for larger graphic…
Pulse of the Market Table