Getaway Day: Investors Head out for the Holidays Still Waiting for That Santa Rally

Getaway Day: Investors Head out for the Holidays Still Waiting for That Santa Rally

Key Takeaways

    Home Sales and Consumer Sentiment Data Buoy Investors After Thursday’s Rout

    As 2022’s Final Trading Week Begins, Keep an Eye Out for Bargain Hunters at SPX 3,800

    Stocks May Be Getting the Headlines, But Oil’s Still Moving Up

Shawn Cruz, Head Trading Strategist, TD Ameritrade

To Our ReadersThis will be our last scheduled Daily Market Update for 2022, unless there’s significant market volatility next week. Otherwise, we’ll be back Tuesday morning, January 3. We hope you have a wonderful holiday and thank you for reading!

(Friday Market Close) The last five trading days of the year—normally associated with the so-called “Santa Claus rally”—began Friday with light gains that weren’t enough to prevent a third-straight losing week for the benchmark S&P 500® index (SPX). Investors left for the holiday weekend continuing to fret about inflation and Federal Reserve policy.

The market didn’t seem in the mood for holiday surprises, trading in a tight range but closing near the session high of 3,845 for the SPX. That could be a positive sign for the rally getting more traction next Tuesday when markets reopen. The close came in solidly above key support near 3,800 but wasn’t above the 3,850 mark that bulls had targeted. Keep an eye on 3,835 Tuesday as a place where support might come in on a retreat.

Friday’s strength came after inflation expectations moved lower in November, something the Fed should like to see. The final December University of Michigan Consumer Sentiment Index showed year-ahead inflation expectations fall to 4.4% from the previous 4.6%, the lowest level in 18 months.

In addition, November New Home Sales came in well above expectations at a seasonally adjusted 640,000 versus the consensus estimate of 600,000 and the upwardly revised 632,000 in October.

The housing rebound shouldn’t have been too hard to predict considering how mortgage rates declined in November from a multi-decade peak this past summer and fall. This falling-rate trend continued in December, as Freddie Mac said Thursday that the average 30-year mortgage was down for the sixth week in a row to 6.27%.

Looking back at this morning’s surprisingly sharp 2.1% drop in November Durable Goods Orders and 0.4% increase in Personal Income, it’s fairly easy to see why some analysts saw it as negative and the market initially dipped. The rise in income likely reflects continued wage pressure on employers, even as demand for their goods (Durable Orders) falls sharply. That’s a recipe for sliding margins and possibly declining earnings potential in the new year. Not what the market wanted to see.

It also points up the Fed’s continued challenge in keeping wages from running away and pushing up inflation, even as other economic indicators slow.

That particular combination has a bad word associated with it: Stagflation. And that word was echoing around Wall Street early Friday.

With COVID-19 cases building in China and a winter storm hurting U.S. demand, it may seem surprising to see WTI Crude Oil (/CL) up 7% this week to back above $80 per barrel. Some of Friday’s strength in crude, which boosted energy stocks, could be linked to jawboning by Russia about possibly reducing production in the new year. Another factor could be the U.S. government, which began buying crude recently to restock the depleted Strategic Petroleum Reserve (SPR). U.S. supplies, even outside the SPR, remain at low levels for this time of year.

Data Holiday

If you’re heading out of town for the holidays and worried about missing key economic data next week, don’t be. The calendar next week is as light as they come, with almost no major reports expected other than the usual weekly updates on initial jobless claims and crude oil inventories.

The only exceptions are reports that normally have a low impact even when people are around and trading, like the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index for October due Tuesday and the December Chicago Purchasing Managers Index (PMI) on Friday. Chicago PMI was extremely weak in November with a softer-than-expected headline number of 37.2, so we’ll see if it rebounded at all. If you want earnings, nothing’s on the calendar next week, but you’ll probably like the January schedule.

Thinking Cap

If you’re a long-term investor, these are tough times. The SPX is down about 20% this year, and there’s been no relief in the bond market. It’s certainly understandable if you’re not particularly enjoying this holiday season.

    There’s no rule against reducing your stock exposure but remember not to let emotions cause you to sell. If you do decide to get out of some stocks, do so carefully and in a way that allows you to take advantage of tax-loss harvesting before the end of the year.Also, keep in mind that if you have a retirement plan that automatically purchases stocks, it’s not a bad idea to keep that going, as unpleasant as it may seem when the market keeps sliding. The good thing about participation in your company’s retirement plan is that it allows you to take advantage of dollar-cost averaging, which means you get to buy stocks at lower prices when the market dips.And remember that those who cash out tend to miss out. Staying invested through good times and bad often turns out to be constructive, though certainly these are undeniably unpleasant times to be invested.

Reviewing the Market Minutes

Looking back at the SPX performance Friday, it tested 3,825 mid-morning but was able to hold and then clawed its way back toward 3,850. A close above that would have been considered a technical victory. But it wasn’t to be.

Energy companies again dominated the list of top SPX gainers Friday, with Halliburton (HAL) gaining 4% and Hess (HES) up nearly 5%. A couple of the mega-caps, Amazon (AMZN) and Alphabet (GOOGL) posted decent gains, but major indexes got no help from Apple (AAPL) or Microsoft (MSFT). Tesla (TSLA), now down 37% this month alone, continued to struggle. In sum, lack of support from the mega-caps probably kept the SPX from nosing above 3,850.

Bargain-hunting continues to show up when the SPX drops below 3,800, knowledge that traders might want to tuck away for next week. It’s also positive that all 11 S&P 500 sectors managed to post gains Friday, though only energy made a big move higher.

If today was actually the start of a Santa Claus rally, the levels to watch out for above on the SPX are 3,850, 3,870 and above that the 50-day moving average (MA) near 3,880. On a big upward move, the 100-day MA of 3,915 might come into play.

The 10-year Treasury yield continued moving higher Friday to finish at 3,75%, well above the month’s 3.4% low. Rising yields can help keep the brakes on stocks, especially ones in growth areas like info tech.

However, the Cboe Volatility Index® (VIX) fell back below 21 by the end of Friday’s session after a mid-week climb above 24. The easing VIX could signal a less challenging upward path for stocks in days to come.

Here’s how the major indexes performed Friday:

    The Dow Jones Industrial Average® ($DJI) rose 176, or 0.53%, to 33,203.The Nasdaq Composite® ($COMP) rose 0.21% to 10,497.The Russell 2000® (RUT) gained 0.39% to 1,760. The SPX climbed 22 points, or 0.59%, to 3,844, down just a smidgen for the week.

For the year-to-date, the $COMP is the worst performer of the major indexes, down about 33%. The SPX is down almost 20%, the $DJI is down 9%, and the RUT is off 22%. The $COMP is also the worst performer this month as tech stocks keep taking it on the chin.

Some more bullish analysts have taken note of this and point out that price-earnings (P/E) multiples have fallen sharply across the tech space from a year ago. The counter argument is that earnings may have farther to fall, meaning the “P” numerator might still look too high once the denominator declines from here.

Talking Technicals: WTI Crude (/CL) is up sharply this week. The level to watch, according to Briefing.com, is $81.96, the 50-day moving average (MA). Crude finished the week just below that and looks positioned to test it next week after breaking strong resistance recently at a down-trending level on the charts near $77.

Twice this week, the SPX dropped below 3,800 intraday, and each time it found buyers. It shows that when things really sell off, buyers come in, which makes 3,800 a more important post-holiday level.

Did you know, by the way, that Charles Schwab delivers an end-of-day market update podcast each trading session after the close? Be sure to check it out.

Getaway Day: Investors Head out for the Holidays Still Waiting for That Santa Rally

CHART OF THE DAY: FILL ’ER UP. WTI Crude (/CL—candlesticks) is bumping up against some critical technical resistance in its recent rally. The blue line is the 50-day MA just below $82 per barrel, while the red line is downtrending from highs posted earlier this year, and sits near $84. A push above these levels could offer a path back toward the November high of $93. Data Source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Notable Calendar Items

Dec. 26: Markets closed for official Christmas Day holiday. Enjoy if you celebrate! Reader’s note: Unless there is significant market volatility, Daily Market Update will return January 3.

Dec. 27: December Consumer Confidence

Dec. 28: November Pending Home Sales

Dec. 29: Weekly Initial Unemployment Claims

Dec. 30: December Chicago PMI

Jan. 2: Markets close in observance of New Year’s Day. Happy holidays!

Jan. 3: November Construction Spending.

Happy trading,

Shawn

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