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Over the last 10 years there were only two (2) years where the S&P 500 produced negative returns from the beginning of November through the end of the year. These negative returns occurred in 2000 and 2002, which were both vicious bear market years. In the 8 other years, the November/December timeframe produced gains of approximately 4 to 10 percent.
Were most of the gains gotten by the end of November? The chart below illustrates S&P 500 performance in the month of December over the last 10 years. As you can see, there were a total of 4 years out of 10 which produced strongly positive returns of more than 2.5% in December. There were only 2 years where negative returns occurred in December, and only one year (2002) where an extremely negative return occurred in December. December returns of over 4% were achieved in 1998 and 1999 - the last 2 years of the secular bull market, while not quite as spectacular, 2003 and 2004 produced returns of over 3% in the month of December.
With few exceptions, early December appears to be generally strong, mid-December generally neutral, and the pre-Christmas time frame strong. There is a general tendency for performance to drop off between Christmas and New Year's when December performance has already been relatively weak. Today’s Market – Price Action Trumps All Else The stock market was up decisively today and apparently everything that moved was up big. High movers outpaced low movers, including stocks, oil, commodities, and precious metals. Up volume strongly outpaced down volume and total volume was significantly higher than the last few days. More up to follow in all probability. Bonds were down and appear to have resumed their downtrend. The general scenario over the last few days has been for positive economic data to hurt the bond market. With rumors that the fed would stop raising short term interest rates serving as the excuse for the bond and stock market to rally together, after a three day breather, the stock market is rallying once again. Yet this time it is doing so without the bond market. I suppose that we are left with seasonality as the sole reason for the apparent decisive resumption of the year end rally. If there are any storm clouds in the resumption of the year end rally it would be the relative performance of the retail sector during the heart of the holiday shopping season. As a leader of the most recent rally, although they are moving up, the retailers are now a suspect laggard. Many of these companies earn most of their “earnings” during this season, and a failure to perform may hurt these stocks, which are generally trading at the upper end of their historic valuations. I have not personally been to the mall except for Sunday afternoon when parking was easy, and the stores were not crowded. My humble observations are not enough to draw conclusions….that is unlike the legion of experts espousing their opinion on Bloomberg radio and CNBC. Still the relative strength chart looks ominous for retailers.
There is a sector of the market where I do have anecdotal evidence that is valuable, and that is housing. A close neighbor of mine put his house up for sale in September for a price that had several comparable sales this spring and summer. In spite of the fact that the house “shows” relatively well, it has yet to sell in spite of one “low ball” offer. And now we are in the seasonally slow Thanksgiving to Super Bowl period on the east coast. While the homebuilders have rallied in recent weeks, the overall technical picture still looks pretty bearish to me. Even though it has been a nice rally, the Dow Jones US home construction index still remains about 15% below its all time high. While everything that “moved” was up pretty strongly today, the homebuilders, composed of builders that generally “move” a lot, were up only 1%.
I am long gold, silver, and their stocks, and should be happy that they are performing well with gold closing at a 20+ year high today ($503.60), and silver at $8.50 per ounce. Well truthfully as an investor, I am satisfied with their intermediate term performance. But this satisfaction loses some luster while observing that this overpriced and speculative stock market continues to rally on very little else except what month of the year it is. So how correct is a fundamental call in precious metals? On the energy front, in my view there are now good entry points or add-to positions for many energy stocks. Here is a chart that has been referenced many times before showing two trendlines for oil – still intact. We are now at the lower trendline where there is a good entry point. If it breaks decisively lower, this would tell us that the trendline no longer applies (and suggest a stop out). Yet the trend deserves the benefit of the doubt until proven otherwise.
I am long Canadian Natural Resources CNQ, a stock that has held its own in the recent oil swoon. If it breaks decisively below the 50-day moving average…well then this analysis was wrong. Still the risk to reward ratio appears to be favorable in my view. It is still a bull market until proven otherwise.
Finally, I wish to end with some venting upon Google. While as a “new economy stock” that is involved exclusively with the high growth internet, I’ll give you that it is difficult to ascertain the true value of the company (me thinks less that $120 billion). Yet it is absurd to note that Google has a market capitalization that is greater than any two of the three largest INTERNET companies combined. The capitalizations of Yahoo and Ebay combined do not equal the capitalization of Google. Amazing! Fact is, the biggest challenge Google faces is growing and diversifying their business without giving the impression that they are competing with these excellent, well established companies. This is a big challenge indeed for a company that has an enterprise value that is now greater than Berkshire Hathaway. I would go long Ebay and Yahoo, while shorting an equal dollar amount of GOOG…ah…let me cool off….that would be speculation….I’ll be OK! Have a great evening. Martin Goldberg
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