December Almanac: Small Caps Takeoff, Free Lunch Served, and Santa Comes to Town By: Christopher Mistal & Jeffrey A. Hirsch | November 22, 2016 | Email | Print

 

Market trading in December is holiday inspired and fueled by a buying bias throughout the month. However, the first part of the month tends to be weaker as tax-loss selling and yearend portfolio restructuring begins. Regardless, December is laden with market seasonality and important events. 

 

Small caps tend to start to outperform larger caps near the middle of month (early January Effect) and our “Free Lunch” strategy is served from the offerings of stocks making new 52-week lows on Triple-Witching Friday. An Almanac Investor Alert will be sent prior to the open on December 19 containing “Free Lunch” stock selections. The “Santa Claus Rally” begins on Friday December 23 and lasts until the second trading day of 2017. Average S&P 500 gains over this seven trading-day range since 1969 are solid 1.4%. 

 

This is the first indicator for the market in the New Year. Years when the Santa Claus Rally (SCR) has failed to materialize are often flat or down. Of the last four times SCR (the last five trading days of the year and the first two trading days of the New Year) has not occurred were followed by two flat years (1994 and 2004) and two nasty bear markets in 2000 and 2008. As Yale Hirsch’s now famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”

 

In the last sixteen election years, December’s ranking slip modestly to #3 S&P 500, #5 NASDAQ, but DJIA remains #2. Small caps, measured by the Russell 2000, have had a field day in election-year Decembers. Since 1980, the Russell 2000 has lost ground just once in nine election years in December. The average small cap gain in all nine years is a solid 3.0%. The Russell 2000’s single loss was in 1980 when the Prime Rate was 21.5%.

 

 

December Triple Witching Week is more favorable to the S&P 500 with Monday up eleven of the last sixteen years while Triple Witching Friday is up twenty-four of the last thirty-four years with an average 0.4% gain. The entire week has logged gains twenty-five times in the last thirty-two years. The week after December Triple Witching is the best of all weeks after Triple Witching for DJIA and is the only one with a clearly bullish bias, advancing in twenty-four of the last thirty-four years. However, three straight years of declines from 2006-2008 have tempered its bullish bias. Small caps shine especially bright the week after Triple Witching with a string of five bullish days in a row.

 

Trading the day before and the day after Christmas is generally bullish across the board with the greatest gains coming from the day before. On the last trading day of the year, NASDAQ has been down in fourteen of the last sixteen years after having been up twenty-nine years in a row from 1971 to 1999. DJIA, S&P 500, and Russell 1000 have also been struggling recently and exhibit a clearly bearish bias over the last twenty-one years. Russell 2000 record very closely resembles the NASDAQ, gains every year from 1979 to 1999 and just four advances since.