Friday, December 1, 2017

How will market finish the year?

  • Last 20 years: December ranks fourth in monthly performance with an average gain of 1.47%
  • Last 20 years: The average daily trend starts strong then fades mid month only to finish close to the highs
  • Last 20 years: October is the least volatile month 
  • Since 1950: December ranks 1st in monthly performance with an average gain of 1.62%
  • Since 1950:  December is the least volatile month and is higher almost 75% of the time
  • Since 1950:  If the S&P is up greater than 15% through November, November was positive, and November hit a new high, the average return for December is 1.92% (10 prior instances)

The general market remains firmly in an uptrend and bull phase as the S&P, Dow, NYSE, Russell 2k have all hit new highs in November.  The Nasdaq is slightly below new highs with recent rotation out of big cap tech on Wednesday as managers seem to be positioning their portfolios in financials and small caps with the prospect of tax reform before year end.   While the overall trend remains up and the seasonal data presented above is favorable for the markets to finish the year strong we always look at all the data to shape a thesis.  There are certainly more than a few indicators flashing a cautionary sign as the indexes have become overbought in recent days.  Strong markets tend to stay overbought and this year is not different.  However from a tactical standpoint we always try to survey the whole landscape to make more informed decisions.  The S&P has flashed overbought conditions with respect to RSI, Stochastics, Bollinger Bands, etc.  The CBOE equity put call volume ratio hit a new low for the year as traders remain very complacent.  The CNN fear and greed index is showing levels of green but well off extreme levels earlier this year.  All of these overbought conditions are not a reason to sell but rather raise our level of awareness to a potential consolidation or pullback in the ongoing upward momentum.  A recent post from the always informative fat pitch blog focuses on a data point that shows the unfavorable risk-reward conditions over the next few weeks. 

In summary, as we head into the last month of the year we continue to favor the long side of this market.  As always, there are some warning signs from a tactical standpoint that have heightened our senses.  From a risk management perspective we have continually raised our stops on existing positions while looking for opportunities from sector rotation and pullbacks in current leaders.  At some point the markets will have a real correction of more than the measly 2.9% we have endured so far this year.  That outcome may have to wait until 2018 as investors put off selling winners into the new year on the prospect of tax reform. 

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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