With nine trading sessions of the New Year complete, January and 2021 are off to a solid start. DJIA is up 1.26% as of today’s close, S&P 500 stands at 1.05%, NASDAQ 1.74% and small caps, measured by the Russell 2000 are up a whopping 9.14%. These gains all point to and confirm the return of seasonality that we have recently noted.
Last September was weak as it has historically been, then October exhibited it historical tendency toward volatility while November and December were both positive, in line with typical seasonal patterns. A positive Santa Claus Rally and First Five Days are also encouraging indications that seasonal forces are once again tracking. We expect seasonality will continue to present itself going forward as extraordinary efforts are made to quell the pandemic and return to a pre-Covid, open-for-business, way of life.
Due to the reemergence of seasonality, we would not be surprised to see some market weakness in the second half of January next week that could persist throughout the rest of January and possible spill over into February. In the following seasonal pattern chart of January, the last 21 years of data for DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 have been plotted with January 2021 through today’s close plotted on the right vertical axis.
Over the last 21 years, it has been NASDAQ leading at the halfway point, this year it is Russell 2000. Other than that, the major indexes have been tracking their historical patterns fairly well. There was strength early on, followed by sideways action. Should the current trend follow historical patterns then weakness after the eleventh trading day (January 18) is possible. Any weakness could be considered an opportunity to add to existing positions or to put new capital to work as more than half of the “Best Months” still remain.
In the near-term there are a few possible catalysts to trigger a brief market pause or pullback. Valuations are one potential area of concern as they are quite elevated within historical context. The run-up in equity prices has been fueled by expectations of a strong rebound in earnings. If that rebound is not as strong as anticipated, it could easily trigger some selling.
Sentiment is also quite lofty suggesting that the majority of capital that wants to own stocks, most likely already does. Recent employment numbers, although largely overlooked on the premise they are just poor enough to support further stimulus, are also concerning. Here again, consensus is nearly certain that the new administration will be able to deliver a big and timely stimulus package. Entirely possible, but it also appears to be a perfect setup for disappointment.
Longer-term, we remain positive on the economy and the market and await the January Barometer’s reading at month end. Should the S&P 500 finish the month with a gain, no matter the size, it will complete the historically bullish January Indicator Trifecta which would further boost prospects for a positive post-election year 2021.
Portfolio Updates
Over the last eight weeks through yesterday’s close, S&P 500 climbed 6.8% while Russell 2000 leapt 19.4%. During the same time period the entire portfolio climbed a respectable 3.5% higher excluding dividends and any trading fees. Our Mid-cap stocks were responsible for the majority of the overall advance, gaining 6.4%. Small-cap stocks rose 3.7% on average including the sizable cash balance held in that portfolio while our Large-cap portfolio trailed with a small 0.2% gain.
The Free Lunch basket of stocks making new 52-week lows on quarterly options expiration in December was a dud this year. There were a very limited number of new lows to choose from and those that did meet the criteria for inclusion were down for good reasons. There have been baskets of three stocks in the past so this year was not the first time for such a small basket. Nonetheless, all three positions were added to the portfolio on December 21 and all three have already been stopped out. Only A2 Milk Company (ACOPF) managed to post a small gain of 1.2%.
Sizable gains by Russell 2000 would suggest small-cap stocks in the portfolio should have performed well too. With the exception of the two Free Lunch Stocks, that is the situation. The open position average performance has climbed to 39.8% versus 20.5% in the last update. The five new positions presented on November 12, are now up an average of 26.2%. AVID Tech (AVID) is the top performer of the group, up 52.5% as of yesterday’s close. Small-cap banks have also enjoyed solid gains as the Treasury yield curve has steepened and stimulus payments were sent out. Xpel Inc (XPEL) ran away and has been cancelled.
Mid-cap positions also performed well, but with a few exceptions. Overall gains were supported by healthy advances by Valmont Industries (VMI), Aerovironment (AVAV) and OSI Systems (OSIS). The average performance of these three positions was 22% before today’s trading. AVAV’s 30.28% advance today on news it is purchasing Arcturus UAV further lifts gains.
Performance in the Large-cap portfolio was held in check by numerous defensive positions (shaded in light grey in table below) that have been held since April of last year. Many of the defensive positions are from interest rate sensitive sectors like Utilities and Consumer Staples. Weakness in these positions offset gains made by recently added positions. Overall performance was also hindered by two positions being stopped out, Entergy Corp (ETR) and Solarwinds Corp (SWI). Bright spots include Autodesk (ADSK) and Infosys (INFY); both are up over 20% since joining the portfolio last November.
Please see table below for specific buy limits, stop losses and current advice for each position in the portfolio.