Year-End Review Webinar with RIA Database: With inflation concerns impacting many facets of the US markets in 2021, we will address how leadership trends across major asset classes and US equity sectors have adapted to these pressures in an upcoming webinar with RIA Database. The discussion will take place on December 8th at 2pm ET and is approved for one hour of CFP®, CFA® & CIMA®, CIMC® or CPWA® CE Credit for webcast attendees. Click Here to Register.

Our long-term relative strength rankings through DALI have had quite a few shakeups over the past two weeks. Last Friday, we discussed the shifts that had transpired within the fixed income rankings in DALI as Convertibles & Preferreds continue to lose signals while Long Duration U.S. Treasuries continue to gain. The size and style rankings have also had notable changes occur since the close on November 26^th. While the top two ranking size and style groups, Small-Cap Growth and Mid-Cap Growth, continue to reside at the top, they have lost 5 and 3 buy signals, respectively. Probably the most noteworthy change to the rankings is Small-Cap Blend falling from the 3^rd rank to 6^th and losing 5 buy signals since November 26^th. The size and style group that has gained the most signals over this time is Large-Cap Growth, up 7 buy signals. As of the close on the 6^th, Large-Cap Growth is the highest-ranking size and style group within the Asset Class Group Scores page with an average group score of 3.90.

Below we have a couple of proxies as representatives for the Small Cap Blend and Large Cap Growth areas of the size and style rankings.

First, we have the chart of the First Trust Small Cap Core AlphaDEX Fund FYX. The fund still maintains a high fund score of 4.64, but the chart returned to a sell signal by breaking a double bottom at $93 on 11/30. This followed the chart rallying to a new all-time high earlier in November at $100. Ultimately, FYX fell to $92, its lowest level since September of this year, before reversing back into a column of X’s at $95 with action on December 6^th. The recent action has led FYX to move back within the trading range of $86 to $97 that it spent roughly 8 months of this year within prior to breaking to a new all-time high in early November.

On the chart of the First Trust Large Cap Growth AlphaDEX Fund FTC, the fund still maintains a buy signal following its third consecutive breakout at $120. FTC rallied up to a new all-time high at $124 before reversing down last week at $118 and falling to $116 on the chart. FTC maintains a fund score of 5.13, speaking to the fund’s resilience.

As can be seen from both charts, each fund has pulled back along with the broader market. But both pictures shed light on the broader size and style groups themselves as Small Cap Blend has pulled back to its prior trading range and Large Cap Growth has maintained its strong trending picture. On a relative basis, this has led to Large Cap Growth to gain signals while Small Cap Blend has lost signals in recent weeks. 

The Santa Claus Rally refers to a historical tendency toward positive equity returns during the last week of the year as well as the first couple days in the New Year. The time period encompasses the last five trading days of the year and the first two trading days of the New Year, so seven trading days in all. As we touched on in yesterday's report, markets have historically seen outsized returns in the second half of December, but this is especially true when examining only the seven-day trading period after Mr. Kringle visits all the children lucky enough to make the "nice" list.

A number of theories have been offered to explain the Santa Rally including tax positioning, a general sense of happiness and optimism on Wall Street, and that many large institutional investors wrap up most of their business before the holidays to go on vacation, leaving most of the trading to retail investors who tend to be more optimistic.

The chart below shows the S&P 500 (SPX) Santa Claus Rally returns from 1957 through 2020, depicted from strongest to weakest.

Whatever, the reason behind the tendency, the S&P (SPX) has posted an average gain of 1.10% during this period (from 1957 through 2020), which is not bad for a one-week return. Not only has the Santa Rally produced relatively strong 7-trading day returns, but it has also shown an impressive batting average – since 1957 the S&P has posted a gain during the period 73% of the time. During the years in which the Santa Claus rally produced a gain, the average improvement was 2.08%. The best Santa Clause rally came in 2008 as the SPX saw a gain of 7.45%. On the other hand, during the years that the Santa Claus Rally brought coal, the average loss was -1.6%, the worst performance coming in 1999 when the SPX posted a return of -4.04%. Last year, the S&P was near its historical average, producing a 1% gain during the Santa Rally.

The other major US benchmarks have had similar returns. Since 1972, the Nasdaq (NASD) has had an average Santa Rally gain of 1.5%, producing positive returns 71% of the time. Meanwhile, since 1900, the Dow (DJIA) has also gained a 1.5% on average, with 74% of the returns being positive.

Of course, 2021 has already been a very strong year for US equities. SPX, DJIA, and NASD are up 22.25%, 15.10%, and 18.13% year-to-date, respectively (through 12/6), so does that change the calculus at all? Should we expect a weaker Santa Rally given the run-up the market has already had this year? As it turns out, based on the historical trend, the answer is no.

The chart below plots the returns from past Santa Rallies for all three indexes, it also shows the average returns for all years and the returns for just the years when that index was up 10% or more.

As you can see, the proportion of positive Santa Rallies for each index is higher in years with double-digit gains than across all years. Meanwhile, both the S&P and the Nasdaq show higher average gains during the Santa Rallies in years when they were already up 10% or more. The Dow is the only one of the three that shows a lower average Santa Rally gain in years where it has already risen 10%, but, it still shows a positive gain of just under 1%.

However, one point that runs contrary to the historical bias of the Santa Rally is the negative slope of the trend line seen on the chart, meaning that we have seen the magnitude of the Santa Claus Rally decrease over time.

Of course, there is no way to know for certain what this year has in store, whether the last week of the year will usher in another rally or if Santa will be leaving behind a lump of coal, but based on the historical data, we wouldn’t wager on the market petering out in the last few sessions of the year.