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Why Santa May Be Especially Good to Equities


There is the potential for a trifecta of positive announcements over the next two weeks, which might have positive ramifications for the underinvested equity markets.

I spent last week in New York City seeing accounts and doing the media "thing." On Thursday I went to CNBC's Englewood Cliffs studio to see some friends and do a TV "hit" with my friend Brian Sullivan. Much to my surprise, Brian began the show by talking about the "Sauta Clause" rally, not only because I was on the show, but because I have been suggesting that the Santa Clause rally had already begun. Indeed, in my commentary of November 28, 2011, titled "The Oath," I wrote:

Last week's wilt brought the "selling stampede" to session 19, as well it punctuated the now ~8.2% decline by the senior index since the Dow Jones Industrial Average closing reaction high of October 28, 2011 (12231.11). Recall that such stampedes typically last 17-25 sessions with only one- to three-session pauses, or rally attempts, before they exhaust themselves. In addition, the S&P 500 has experienced seven consecutive sessions on the downside, and markets rarely go that many days in a row in any one direction. Moreover, as of last Friday the selling skein has left the McClellan Oscillator as oversold as it was at the August 8 and 9 'lows.' Therefore, the stage is set for some sort of tradable bottom.

Since then the stock market has rallied some 7% as measured by the DJIA. Despite that surge, the McClellan Oscillator is not in overbought territory, although it has traveled into neutral ground, as can be seen in the chart below:

Source: Bloomberg.

Still, I think the equity markets will continue to work their way irregularly higher. The driver for that view should be multifaceted. This week's causa proxima will likely be the Sarkozy-Merkel "hook up" slated for today, followed by Friday's European Union summit. I believe some sort of progress will be made in buying time for the Club Med countries. To that point, last week I was asked by numerous accounts why I have been somewhat optimistic about Euroquake. After listing the litany of reasons so often scribed in these missives, I said:

The ECB, as well as the bureaucrats surrounding it, do NOT want to lose their power. If the Euro falls apart they most assuredly will lose power. Additionally, in my 41 years in this business when something absolutely had to happen, it typically happened; remember in 1974 when NYC was broke?

This week's aforementioned duo of events will be followed by next week's Fed confab. Parsing recent comments from various Fed governors suggests there is the potential for a QE2 type of announcement from the December 13 Federal Open Market Committee gathering. To wit, Fed Governor Janet Yellen recently said, "The Fed continues to provide highly accommodative monetary conditions to foster a stronger economic recovery in a context of price stability."

She further opined, "The scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer term financial assets."

While Yellen is considered a "dove" on policy, history shows Fed members choose their words extremely carefully. The inference is that she would not be using such language unless something was afoot. Other Fed members have been uttering similar thoughts. Accordingly, I think there is the potential for a trifecta of positive announcements over the next two weeks, which might have positive ramifications for the equity markets, especially with so many folks underinvested.

Manifestly, most of the hedge funds I met with last week were actually hoping the equity markets would decline because they are underinvested. Unfortunately, they are not alone. To be sure, only 23% of stock fund managers are outperforming the S&P 500 (SPX) this year, while most endowment funds are performing just as badly because they too are underinvested in US equities.

If these "thin reed" insights become weaved into an "investment bouquet," I believe the ensuing "performance anxiety" will force such investors to chase stocks irregularly higher into the end of the year. If that's correct, the question then becomes what do you buy on a risk-adjusted basis.

First, looking back at the past few years, we have found that coal stocks tend to outperform in December. This can be attributed to several factors, including higher seasonal demand in the winter, depletion of coal stockpiles at utilities, and relatively weak performance during the summer months.

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No positions in stocks mentioned.
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