Santa Claus is Coming to Town

It is well known on Wall St. that the end of the calendar year is the strongest in terms of market returns. This end of the year strength a.k.a "the Santa Claus Rally" is consistent and powerful. In fact it is so consistent that there are usually major implications if it doesn't happen; As the saying goes:

"If Santa should fail to call, the Bear will come to Broad and Wall."

If stocks fail to rally at year end, there are much larger forces putting pressure on the market. How the market behaves during this time is a good general health gauge for risk assets. US stocks should do well at year end for a number of reasons, but most importantly because we are a consumer based economy and the majority of retail sales are made during the holiday shopping season. If stocks perform poorly at the end of the year it is likely because those sales are weak and consumers have less disposable income to help stimulate the economy.

Fortunately for us it appears that Santa Claus is on schedule this year as we saw a huge surge in stock prices for the last full trading week of the year. We now would hope that the strength continues into year end as is the typical pattern. The SP500 has rallied 95 points in the last 3 days and had back to back +2% rallies on Wednesday and Thursday. The Federal Reserve maintained the status quo this week by announcing a continued patience before raising interest rates. The market was waiting for an excuse to rally and with oil finally slowing its relentless skid, market participants had all they needed to spark the buying surge.

SP500 Daily bars- 6 months

Depending on your investment timeframe, the past couple weeks have either been very stressful (if you trade a shorter timeframe) or simply consolidative action (if you trade a longer timeframe). By stepping back a bit from the daily noise of the market, the weekly charts reduce your emotional reactions and keep the larger trend in better perspective.

SP500 Weekly bars- 2 years

What has surprised me the most, probably because I invest both shorter term and longer term, is how volatile the shorter term has felt while my weekly stops were never even close to being tested. From a comfort perspective, the longer term view is remarkably peaceful compared to the shorter term, for whatever that's worth. 

As we head into the two remaining holiday shortened weeks of the year we have one new entry signal and a couple of trailing stops that need to be moved higher. Lets take a look. 

+Entering Honeywell (HON)

This is a position we entered in late July and were quickly stopped out as the breakout signal failed. Shortly after our exit HON took a sharp dive that looked like a full trend breakdown. However since that time the stock has shot back higher and this week closed at all-time highs.

I really like how the Relative Strength is breaking out to the upside showing a strong rotation of money into the stock. For risk management purposes I want to the use the support range lows at about $94.80 as my initial stop area. HON last week pulled back to retest that breakout level, the fact that it held and then resumed to new highs signals strong buying interest.  

I find when trades fail but then quickly re-trigger tend to be quite reliable and successful. This is likely due to the stubborn attitudes of humans and being proven wrong. We don't like to admit being wrong. We really don't like admitting being wrong again in such a short period of time. It is damaging to our fragile egos and therefore most would just prefer to look elsewhere for an "easier to swallow" opportunity. But if you are impartial enough to get right back in there, you are often handsomely rewarded. 

"From false moves come fast moves" as they say, and a stock coming off a hard shakeout can create a very good opportunity as sentiment has not been able to properly catch-up to the rapid price shift.


PPG

PPG has demonstrated remarkable strength since our entry 4 weeks ago. With the 20 WMA now caught up to the weekly pivot low, we can move our stops to that level at $204. 

HAIN

What a winner HAIN has been! We have given this a lot of room since entering our position but now the market is telling us we can move it on up. There is now a strong confluence of support at $104 and a break of that level would suggest more caution is needed. 

Something of note is that HAIN stock will be splitting 2-1 within the next two weeks. This doesn't change any of the company dynamics but it will cut the price of the stock in half. Using past examples as our guide, stock splits tend to create buy interest and an upward bias following the split. I guess people like more shares and a lower price tag.

Watchlist Ideas

With 2014 about to wrap up I have updated our watchlist stocks, sticking to the current holdings of the SP500 Sector Top 10 holdings list. Here are a few names I'm watching:

FB

LMT

TWX

INTC

NEE

EXC

CSCO

KMI