Early Christmas For Banks? 10-Year Yield Flirting With 1% Again As Holiday-Shortened Session Starts

(Thursday Market Open) Even with uncertainty around stimulus, it looks like investors may actually get a Christmas gift this year in the form of a Brexit deal. Media reports say it looks close, and that’s helping lift stocks ahead of the holiday.

Market impact of a deal is hard to say, because this is something that’s never been done before. Nobody’s ever left the E.U. Short term, it’s great news for the markets because it removes a possible source of uncertainty, but long term we don’t know the ramifications of Brexit. It’s very likely to be back on our news radar at some point in Q1. 

Aside from Brexit—which also appears to be giving the British pound an early lift today—people around the market are just waiting to see what happens with stimulus and coronavirus. There’s a lot of concern on both fronts and no solid answers ahead of the holiday. 

Right now, things are up in the air as President Trump has openly criticized the $900 billion stimulus bill. It’s an open question if he’d actually veto it, a move that could cause a government shutdown next week and delay the proposed $600 checks to most Americans. Democrats in the House look ready to try and approve a $2,000 check today. Basically, it’s a fluid situation and probably worth monitoring over the weekend. One thing to remember is that in the past, Trump sometimes slammed legislation he didn’t like but signed it anyway. 

Today’s session is a short one, with the New York Stock Exchange (NYSE) closing at 1 p.m. ET ahead of tomorrow’s Christmas holiday. There won’t be a Daily Market Update tomorrow, but we’ll be back next Monday. 

A lot of participants probably already left for the holidays—or at least have one foot out the door—which means thin volume could cause some sharper price moves. That’s potentially the case not only today, but next week as well. So if you’re trading the market between now and the new year, remember things might be even more unpredictable than usual.

Anyone Out There?

So what’s going on next week? Anything? Obviously vaccinations will continue and post-Christmas sales could start to show up at your local retailers. But that’s not all. If you’re around and following the markets, a few things on the radar might be worth your attention in the days ahead.

Though most people are probably staying home for Christmas (and we’ll look at holiday air travel data next week), if you’re flying next week there’s a chance you might be boarding a 737 Max. That’s  assuming you’re flying one of two Max flights a day—or one round trip from Miami to New York LaGuardia that American Airlines AAL has said it will begin on Tuesday, according to Reuters. It’s obviously a huge milestone for Boeing BA after grounding the entire Max fleet in March 2019 following two crashes. Time will tell if passengers feel comfortable on this aircraft, but you have to think it might now be one of the safest in the world after all the testing it’s gone through. 

If you thought no one reports earnings between Christmas and New Year’s, you’d be wrong. One company does, and though it’s not exactly a household name, keep an eye on their results if you just can’t handle a week with no corporate results. The firm is Chinese social media company Weibo WB, and it reports this coming Monday. Weibo means “micro blog” in Chinese, and according to the South China Morning Post, “Hundreds of millions of netizens across China use Weibo as a platform to exchange information and voice opinions on social issues in a nation under strict news censorship.” 

As noted here yesterday but worth repeating today, things could be relatively quiet as the holiday-shortened week approaches its close, but there could also continue to be some profit-taking pressure as the year winds down. We’ll have to wait and see. 

Homework for the Holidays

Even if you’re not actively participating in the market during this holiday period, it doesn’t necessarily mean you should just drink eggnog and eat Christmas cookies and forget your portfolio. 

Year-end bookkeeping can be an integral component of investing, so consider taking advantage of tax-loss harvesting, pruning any positions that may have grown greater than their original sizes, and shoring up your allocations in the coming week. After a volatile year, certain sectors such as Technology, Communication Services, and Consumer Discretionary saw sharp rebounds, while Financials and Energy have been relatively weak. 

And it’s not just sectors that fall in and out of favor. Investing styles—particularly the classic “growth-vs.-value” paradigm—has seen some ebb-and-flow amid COVID-19. The same can be said for market capitalization, with large-caps leading for much of 2020, but small-caps coming on strong in the final months of the year. Which categories might be positioned for strength coming out of the crisis? The year end might be a time to consider changes—while keeping any portfolio moves within the context of your long-term goals.

CHART OF THE DAY: HOLDING SUPPORT. The S&P 500 Index (SPX—candlestick) is holding its 20-day simple moving average (blue line) support at 3676. As we head toward the end of the year, it’ll be interesting to see if it continues to maintain this short-term support level. Back in late Oct–early Nov., SPX did break below this support level but recovered, moved back above it, and continued its uptrend. So, a downside break wouldn’t necessarily be negative for the market but if it happens, it could be an indication of a possible pullback. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

If You Think This Market is Hot: Here’s some more evidence, thanks to Barron’s. It reported this week that about 83% of S&P 500 stocks were trading above their 50-day moving averages, according to research from Canaccord Genuity strategists. That’s up from 76% last week. Though there’s no guarantee, it can sometimes signal an “overbought” scenario when stocks reach these conditions. The Russell 2000 Index (RUT) has the most premium built in right now of any major index at 34% above its 200-day moving average (the highest it’s ever been above that). Maybe investors are starting to take a hint, since the S&P 500 Index (SPX) has fallen slightly (less than 1%)  since Dec. 4, but it’s never safe to count out more bullish steam ahead. 

Predicting things is never a good idea, but where might more steam come from if it does happen? The worst-performing sectors over the last month share one thing in common: They’re all “defensive” ones that tend to do better when times get tough. These sectors are Utilities, Real Estate, and Staples, the only ones in the red over the last 30 days. Does this mean they potentially can turn around or perhaps benefit if investors flee from some of the best performers in the final week of the year? We’ll see, but there’s been no sign of that yet this week. All are lower. Still, Energy is getting hit hardest so far this week, even after a good day Wednesday. 

Santa Taking a Week Off? If stocks continue to slip in the week between Christmas and New Year’s, that might mean it’s a year without “Santa Claus” for the stock market. The fact that a new administration arrives next month with the possibility of changes to the tax code could mean pressure, some of which we may already be seeing. The other barrier to Santa could be impressions that a lot of the traditional post-Christmas rally got pulled forward by the bullish vaccine news. While a “Santa Claus” rally is a well-known phenomenon, it isn’t guaranteed. Last year, the SPX barely moved in the final week of December, though the final week of 2018 did see a big rally. Going back farther, the final weeks of 2016 and 2017 were no great shakes, either. That means three of the last four years saw relatively mild final weeks.

How Rally Might Extend: However, some market watchers say Santa Claus typically visits the stock market over a longer period, from mid-December to around February, with small-cap companies tending to perform best. The theory works like this: As Q4 winds down, many investors sell their losers and start looking for better prospects, which often leaves stock prices lower in October and November. These lower prices in turn prompt accumulation of shares, which at times has continued through January and February, pushing prices even higher. Seeking even better returns, some investors venture further out on a limb, speculating on small caps they view as undervalued. That’s more fuel for a small-cap rally. Though with small-caps already at historic high premiums to their moving averages (see above), it’s a little harder to see this happening in the coming weeks. 

Good Trading, and Happy Holidays, with best wishes for health and happiness in 2021,

JJ

@TDAJJKinahan

TD Ameritrade® commentary for educational purposes only. Member SIPC.