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Stock Market Outlook for December 1, 2016

 

December, best risk/reward month of year for stocks, has seen S&P 500 Index average 1.4%.

 

Real Time Economic Calendar provided by Investing.com.

 

**NEW** As part of the ongoing process to offer new and up-to-date information regarding seasonal and technical investing, we are adding a section to the daily reports that details the stocks that are entering their period of seasonal strength, based on average historical start dates.   Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.   As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.

Stocks Entering Period of Seasonal Strength Today:

Interfor Corp (TSE:IFP) Seasonal Chart

 

 

The Markets

Stocks ended mixed on Wednesday as portfolio managers window dressed portfolios to close out the last trading day of the month.  The sectors that had performed well through November, such as financials and materials, captured further buying demand, while the laggards (consumer staples, utilities, and REITs) saw renewed selling pressures, ending sharply lower on the day.  Portfolio managers typically like to give the impression that they had exposure to some of the best segments of the market when they report their holdings in the next few days, avoiding difficult conversations as to why undeforming sectors continue to be held.  Underperformers continue to be those areas of the market that are sensitive to higher rates and a stronger US dollar; they also tend to have defensive characteristics that are typically in demand during periods of economic struggle or equity market volatility.  As analysts become more optimistic of the economic prospects under a trump presidency, investors are focussing more on cyclical assets, adopting a “risk-on” bias.  This positive risk sentiment is typically conducive to strength in the broad market, inline with the positive seasonal tendencies through the end of the year.

For the month of November, the S&P 500 Index was higher by 3.42%, almost three times more than the average increase for the 11th month of the year of 1.2%.  Looking forward to December, the average return improves to 1.4% with positive results realized in 70% of periods over the past 50 years.  Returns have ranged from a gain of 11.2% in 1991 to a loss of 6.0% in 2002.  Given this range, December has the best risk/reward of any month of the year, the result of upbeat sentiment through the holiday period.  While overall positive, the tendencies for the S&P 500 Index in this last month of the year differ between the two halves of the period.  The first half typically encompasses the tax loss selling period, falling between December 7th and December 15th, on average.  Average return in the first 15 days of the period is –0.13% with results almost evenly split between positive and negative performance over the last 50 years.  The last half is when the bulk of the gains are generated as investment managers close the books on their portfolios for the year.  The S&P 500 Index has averaged a gain of 1.59% in the last 16 days of the month with positive results recorded in 80% of the last 50 periods.  With this pattern in mind, investors are typically wise to buy the early month weakness, setting themselves up for the Santa Claus rally, which runs into the new year.

S&P 500 Index Returns in December
Year First 15 Days Last 16 Days
2015 -1.78% 0.03%
2014 -3.77% 3.48%
2013 -1.69% 4.11%
2012 -0.18% 0.89%
2011 -2.50% 3.44%
2010 4.63% 1.81%
2009 1.12% 0.65%
2008 -3.09% 3.99%
2007 -0.89% 0.03%
2006 1.89% -0.62%
2005 1.72% -1.78%
2004 2.72% 0.51%
2003 0.93% 4.11%
2002 -5.00% -1.09%
2001 -1.44% 2.23%
2000 -0.21% 0.62%
1999 1.76% 3.96%
1998 -0.07% 5.71%
1997 0.84% 0.73%
1996 -3.75% 1.66%
1995 1.81% -0.07%
1994 0.36% 0.86%
1993 0.01% 1.00%
1992 0.28% 0.73%
1991 2.47% 8.48%
1990 1.43% 1.04%
1989 1.20% 0.93%
1988 0.21% 1.25%
1987 5.43% 1.76%
1986 -0.41% -2.43%
1985 3.84% 0.64%
1984 -0.54% 2.80%
1983 -2.85% 2.02%
1982 -2.37% 3.99%
1981 -2.66% -0.36%
1980 -7.88% 4.87%
1979 2.60% -0.90%
1978 0.67% 0.82%
1977 -1.35% 1.66%
1976 2.98% 2.21%
1975 -3.45% 2.38%
1974 -4.14% 2.22%
1973 -2.78% 4.57%
1972 1.36% -0.18%
1971 4.84% 3.60%
1970 2.82% 2.78%
1969 -3.49% 1.68%
1968 -0.73% -3.46%
1967 1.10% 1.52%
1966 1.48% -1.60%
Average: -0.13% 1.59%
% Positive: 52% 80%

 

Looking at results from the past 20 years, best performing sectors in this last month of the year have been Materials, Industrials, and Utilities, each averaging around 2% over the 31 day period; worst performing sectors have been consumer staples and technology, averaging returns less than 1%.  The month also kicks off a period of seasonal strength in a number of commodities, such as corn, cotton, and platinum.  Economically, the first half of the year tends to be dictated by a pick in industrial production and investors tend to position portfolios ahead of that, resulting in benefits to industrial metals and stocks with exposure to them.

Best Performing Sectors in December

Worst Performing Sectors in December

Helping the S&P 500 Index avoid a deeper loss to close the last trading day of November was the energy sector, which jumped by 4.82%, closing at a new 52-week high.  The move follows a deal from OPEC to cut production by 1.2 million barrels per day from the 33.6 million barrels per day produced currently.   According to the Wall Street Journal, “the OPEC cuts were deeper than many analysts had expected, amounting to about 1% of global production.”  The result saw the price of oil surge by around 10% at the highs of the day, eventually closing the session up by 9.31%.  The news certainly overshadowed the weekly petroleum status report, which maintained a bit of a bearish bias given the rise in stock of refined product.  Oil inventories shrank by a mere 900,000 barrels, while gasoline and distillate inventories jumped by 2.1 and 5.0 million barrels, respectively.  With the weekly change, the days of supply of oil fell by half of a day to 30.2, while gasoline gained by a third of a day to 24.7; the average for each at this time of year is 23.7 days.  Production of gasoline is on the rise, which isn’t all that uncommon through the last two months of the year, but, unfortunately, it isn’t being met with the demand that is typical around the holidays.  And, as OPEC agrees to cut, US producers of oil continue to bring production online with 249,000 more barrels being produced each day now compared to the start of October.  Seasonally, US Production typically continues to rise through the end of the year.

As highlighted, the price of oil jumped by almost 10% on Wednesday, bouncing from its rising 200-day moving average and testing the psychologically important $50 level.  Momentum indicators continue to point higher, potentially giving the commodity the strength to make a run at resistance at $52.  Seasonally, the price of oil tends to chart an important low around the start of December, concluding its period of seasonal weakness.

As for the stocks, the S&P 500 Energy Sector Index closed firmly above resistance at 530, suggesting a breakout above a reverse head-and-shoulders pattern.  The bullish setup calculates an upside target of 680, or almost 25% above present levels.  Relative performance of the sector has flatlined since the end of the last period of seasonal strength in June, charting what appears to be a prolonged bottoming pattern.  A breakout from the relative range could open the flood-gates to buying pressures as investors bet on a return to normalcy in the energy sector.  The period of seasonal strength for the sector kicks off, once again, in January, although a number of constituents can start moving higher in December.

ENERGY Relative to the S&P 500

Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.90.

 

 

 

 

Seasonal charts of companies reporting earnings today:

 

S&P 500 Index

 

 

TSE Composite