Mid-Month Update: November Dip & Open Season for Small Caps By: Christopher Mistal | November 14, 2024 | Email | Print

In last week’s update we anticipated the post-election-day rally would continue, but it also would not likely be a straightforward, unimpeded path higher. After closing at all-time highs on Veterans Day, DJIA, S&P 500, NASDAQ have all paused and weakened modestly in the past few trading sessions. On Monday, Russell 2000 peaked intraday just 1.02 points below its all-time closing high of 2442.74 set November 8, 2021. That date is not a typo, it has been over 3 years since the small-cap index closed at a record high. A breakout to new all-time closing highs by Russell 2000 along with corresponding new all-times by DJIA, S&P 500, and NASDAQ would be bullish and would confirm the current bull market most likely still has room to run.

 

 

In the above chart, a variation of the same chart presented in the November 2024 Almanac Issue from October 24, we have left the Election Year November pattern since 1950 and replaced the recent 21-year November pattern with November 2024 as of today’s close (November 14). This November’s gains use the right-side scale as they are well above historical average performance. Based upon the historical trend, not the magnitude, the market has been tracking the pattern rather closely. The month began with gains, entered into a consolidation period (now), and appears to be heading towards a low, possibly next week. Then we anticipate the rally will likely resume and produce additional new index highs into yearend.

 

 

Speaking of a seasonal low around Thanksgiving reminded us that seasonally speaking, small caps are set up for their annual yearend rally into Q1, often referred to as the “January Effect,” where small caps outperform large caps in January. As we point out on pages 112 and 114 of the Almanac, most of the “January Effect’s” small cap outperformance takes place in the last half of December as tax-loss selling abates.

 

As you can see in the accompanying chart below, the Russell 2000 has been tracking the pattern fairly well since July and it looks like the small fry may finally be coming out of hibernation just in time for small cap stock hunting season. Small caps have leapt higher here in early November and are now in retreat. This aligns well with the annual pattern for Russell 2000 below and with November’s pattern above.

 

 

But as illustrated in the chart, small caps can exhibit some choppy trading from late-October through mid-December. Our small-cap and mid-cap stock picks have historically done well as long as you honor the buy limits and stop losses. If a position is currently trading above its buy limit, patience has generally been rewarded with opportunities presenting through mid-December.

 

 

This trade is featured on page 104 of the Almanac. It takes advantage of all the solidly bullish seasonal patterns that are in play from around Thanksgiving through the completion of the Santa Claus Rally (SCR) detailed on page 118 of the Almanac. You will hear a lot about a Santa Claus rally in media, sometimes they get it right and other times they simply mean any rally in Q4. Our Santa Claus Rally was invented and named by our late founder Yale Hirsch in the 1972 edition of the Almanac. As defined by Yale, the Santa Claus Rally is a short rally that spans the last five trading days of the year and the first two trading days of the New Year. Since 1969, the S&P 500 has averaged 1.3% during the rally, but more importantly, what happens when there is no rally has been even more consequential. We will get into greater detail later.

 

 

Buying the Tuesday before Thanksgiving and holding until the second trading day of the New Year has produced an average S&P 500 gain of 2.58% since 1950 with a 79.73% success rate. Russell 2000 has averaged 3.32% since 1979 with a just as solid 77.78% success rate.

 

Current weakness is an opportunity to establish new positions or add to existing positions in the Almanac Investor portfolios. All advice, buy limits, and stop losses from last week remain current with the exception of Silvercorp Metals (SVM), VanEck Gold Miners (GDX), and SPDR Gold (GLD). SVM, GDX, and GLD have all been stopped out. A strong and strengthening U.S. dollar along with 10-year Treasury bond yields above 4.4% and trending higher are likely to continue to pressure precious metals and the companies that mine and produce them.

 

After struggling to establish a position in iShares Bitcoin (IBIT), a position was added to the Sector Rotation ETF Portfolio on November 8, using its average daily price. Since then, bitcoin and IBIT surged higher but pulled back modestly today. Bitcoin forecasts vary substantially, but $100,000 in the near-term seems likely. Bitcoin does have a limited history, but it has historically enjoyed Q4 rallies and post-presidential election rallies, just like the stock market.