The “Santa Claus” rally is a phrase used to represent the stock market’s typical trend of rallying higher into the end of December. While there is no way to determine the exact cause of this phenomenon, the data shows that December does in fact tend to be one of the best times of the year to be long equities. Perhaps it is just the holiday cheer and a half-glass-full mentality, or, more likely it has to do with a term called “window dressing”.
Image Source: Zacks Investment Research
Pictured: QQQ. The market is off to a rough start in December.
While history tends to rhyme, it does not always repeat. So far, December has brought investors coal in their stockings. The
Nasdaq 100 ETF
QQQ
is down 6.5% month-to-date, as two weeks of trading remain in 2023. However, it may be too early for bears to celebrate. Here are a few reasons why:
Portfolio Rebalancing:
“Window dressing” is a masking technique used by mutual fund managers and other institutional investors to make their portfolios look more attractive to clients. The technique involves purchasing shares in companies that have performed well over the past year so that investors see that the money manager is in the right stocks, regardless of how the fund or institution may have performed. Window dressing typically occurs at the end of a reporting period, such as quarter-end or year-end. Often, window dressing can prop up the overall market.
The Market is Oversold:
% Williams R (Williams Percent Range) is an indicator used by technicians to analyze overbought and oversold levels. The indicator is calculated by taking the high of the past 14 trading days, dividing it by the low over the same time, and multiplying the sum by -100. The indicator then spits out a number between -100 (oversold) and 100 (overbought). Extreme readings favoring one side of the market can inform investors that the market is potentially ready to reverse. While % Williams R is not a panacea, it can be a useful tool when used in conjunction with other indicators. Currently, the
Nasdaq 100 ETF
QQQ
is showing a -95 reading – the most oversold reading in over a month. The QQQ is also filling a daily price gap from November 10
th
which can act as a potential reversal zone (not pictured).
Image Source: Zacks Investment Research
Pictured: % Williams R indicator shows the strongest oversold reading in over a month.
Seasonality:
An often-misconceived notion by investors is that the Santa Claus rally is a full-month phenomenon. Typically, December registers flat performance for the first half of the month on average. Though December tends to be strong as a whole, bulls usually appear in the back half of the month.
Image Source: Zacks Investment Research
Pictured: 10 year chart of QQQ. Most years the index rallys into January.
Key Sector Leadership:
Critical sectors are beginning to separate themselves from the pack, including:
· Energy:
First Solar (FSLR)
&
Chevron
CVX
· Software:
Box Inc
BOX
&
Nutanix
NTNX
· Real estate developers:
Lennar
LEN
&
Toll Brothers
TOL
Summary
While bears have been in firm control over the past few weeks, history tells us that it is too soon to discount the potential for a “Santa Claus” rally. Technical indicators, the potential for portfolio rebalancing, and key sector leadership should give bulls hope for a recovery.
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