After the S&P 500 battled volatility from the Bank of Japan's surprise interest rate hike in August, the market found new buying and has since rallied to multiple new highs. It has kept intact four consecutive higher quarterly closes.
Will this quarter make it five?
The broad market appears to participate in this rally, as seen in the Invesco equally-weighted S&P 500 ETF RSP.
Source: Barchart
After the July-August shakeout, the stock market rally gained a broad following, allowing more stocks to participate in this bull market. In September, the Federal Reserve Board made a whopping 50 basis point cut to the Fed Funds Rate. At the same time, they discussed their path for lower rates going forward.
With the presidential election finally over, I would like to welcome Donald Trump as the 47th president of the United States. The market seems to have breathed a sigh of relief simply because there is clarity regarding which candidates' policies will be presented to the American people. The nervousness of an anticipated close race was seen in the profit-taking towards the end of October until the November 5th decision was known.
The fourth quarter has been profitable for the stock market seasonally. As money from investors pours into the market, the earlier tax loss selling subsides, and year-end bonus money comes rushing in.
LinkedIn editor Rob Sacks reported, "Wall Street bonuses are set to head higher for the first time in three years, according to a report from compensation consultant Johnson Associates. Bankers involved in bond sales could see bonuses jump by up to 35%, while stock traders and those helping with stock offerings can expect increases of 15% to 25%. The upbeat outlook follows a rebound in dealmaking, lower interest rates, and the stock market's record performance. Bonuses had dropped for the last couple of years amid higher interest rates and economic uncertainty."
Technical Picture
Source: Barchart
The year-to-date performance of the S&P 500 has been phenomenal. As of this writing, the market is up 29%. The bull market has been relentless as many have tried to call for market tops, forcing them to cover their short positions and contributing to higher prices. The market has been referred to as overbought, irrational, and many other comments to support the idea the market is turning down. And at some point, all of these pundits will be right. But one thing is sure: trying to time the top of this runaway bull market is not healthy for one's financial assets.
Investors may consider some portfolio realignments and possible changes to asset allocations if they feel uncomfortable with the current market level.
Markets to participate in this opportunity
Equity traders may use the exchange-traded fund (ETF) SPY to participate in this opportunity. At the same time, futures traders could use the mini-contract ES or the micro-contract ET. There are many more vehicles to trade the S&P 500, but these are among the more popular. Also, the S&P 500 is the most liquid index market to trade—allowing for safer executions of your trades.
Seasonality
While the raging bull market is not showing any signs of changing course, an upcoming seasonal pattern may allow traders to put some cash in their Christmas stockings. I am, hopefully, avoiding some coal.
Source: Moore Research Center, Inc. (MRCI)
MRCI research shows that prices year-to-date have been following their 15-year pattern (blue line), and if this continues, the upcoming seasonal buy will play out for traders. The seasonal window (yellow box) reflects a period of historical bullish sentiment in the market, allowing traders to apply their buying strategies anytime in the window.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading/investing choices.
During their research, MRCI found that the December S&P futures have closed higher on approximately December 07 than on November 11 for 14 of the past 15 years, an 87% occurrence. Take note of the first few days of this seasonal window as the seasonal pattern appears to show some consolidation early in the pattern and then resuming the uptrend. With the recent post-election parabolic up move, the market may take this time to trade sideways or correct to lower prices for a better entry.
Source: MRCI
Reviewing MRCI's research results for the past 15 years, notice how four of the years never had a daily closing drawdown. This is an impressive stat for a market as volatile as the S&P 500.
In closing….
As we head into the year's final quarter, traders should remember the historical seasonal patterns that have consistently driven market performance. The S&P 500's impressive rally, fueled by investor optimism and monetary policy shifts, continues gaining momentum, with year-end factors such as reduced tax-loss selling and holiday bonuses further supporting a bullish outlook. The anticipated seasonal buy window, identified through MRCI research, highlights an 87% likelihood of higher December S&P futures, making it an exciting opportunity for traders to align their strategies. However, patience may be needed as early consolidation within this pattern is standard, offering potential buying setups before the market resumes its upward trend.
Despite the optimism, traders should be cautious and avoid relying solely on seasonal trends. While historical data provides compelling insights, the market's trajectory remains influenced by a complex interplay of economic indicators, policy changes, and broader geopolitical developments. Balancing seasonal patterns with sound risk management and an awareness of technical and fundamental factors will be crucial to successfully navigating the market.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
