As defined in the Stock Trader’s Almanac, the Santa Claus Rally (SCR) is the propensity for the S&P 500 to rally the last five trading days of December and the first two of January an average of 1.4% since 1950.
The lack of a rally can be a preliminary indicator of tough times to come. This was certainly the case in 2008 and 2000. A 4.0% decline in 2000 foreshadowed the bursting of the tech bubble and a 2.5% loss in 2008 preceded the second worst bear market in history.
Including this year, Santa has failed to pay Wall Street a visit in just 15 years since 1950. Of the previous 14 occasions, January’s First Five Days (FFD) was down 10 times and the January Barometer (JB) was negative 8 times. When all three indicators were negative, the full year was either flat (+/– 5.0%) or negative with the lone exception being 1982, the year the last secular bull market began.
The lack of a positive SCR is cause for concern, but further clarity will be gained when the January’s First Five Days Early Warning System (page 14, STA 2016) gives its reading later this week and when the January Barometer (page 16, STA 2016) reports at month’s end. A positive First Five Days and January Barometer would certainly improve prospects for full-year 2016. The December Low Indicator (2016 STA, page 44) should also be watched with the line in the sand the Dow’s December Closing Low of 17128.55 on 12/18/15.
Free Lunch Update
As a reminder, our “Free Lunch” (page 112 of Stock Trader’s Almanac 2016) strategy is a short-term trade that takes advantage of several yearend and New Year phenomena. Our research has shown that NYSE stocks making new 52-week week lows in mid-December, primarily due to yearend tax-loss selling, tend to outperform the NYSE through mid-February. These stocks are selected ahead of the Santa Claus Rally (page 114 STA16) and approximately near the start of the January Effect (page 110 STA16).
Many of the stocks selected for the “Free Lunch” trade are down for good reason. Declining revenue and shrinking profits are most common amongst these names while others may have run into legal or accounting trouble. Once a name pops, profits should be taken and conversely if a name continues lower it should be cut loose quickly. This year’s basket is heavily dependent on the performance of the energy and materials sectors, more specifically, crude oil’s price. When crude has a good day the basket does well and vice-a-versa.
Overall, this year’s basket is handily outperforming the NYSE Comp with a 6% average gain at yesterday’s close compared to just 0.3% for the index. NYSE listed stocks, the largest portion of the list, are performing best, up 8% on average. All of these stocks have been added to the Almanac Investor Stock Portfolio. Returns listed in the table below are calculated using either the stocks open price on December 21 or the suggested buy limit if the stock opened higher and then dipped below the buy limit.
Despite a negative SCR and a poor start to 2016, this basket appears to still have plenty of life left in it. We will officially continue to hold the basket in the Stock Portfolio.