Santa Claus Rally Pans Out!

Picks of the Day January 4,2018

Santa Claus Rally Pans Out!

The S&P 500 scaled past the 2,700 point level for the first time ever on Wednesday, while the other large stock indexes closed at new historic highs of their own on the heels of signs of robust economic growth.

Stocks only added to their gains as the day drew to a close, with support from the minutes of the last Fed meeting, from which investors learned that the central bank is expected to stick to gradual rate hikes this year.

Earlier in trading, the figures showed that factory activity grew at a faster than expected rate in December, a sign of economic momentum leading up to the end of 2017. At the same time, the manufacturing survey pointed to a strong opening for the European economy.

On the tech front, Google (GOOGL) and I.B.M. (IBM) – coupled with chip companies – were the strongest drivers yesterday. The tech sector (XLK) was the best performing sector on the S&P 500 in 2017, with gains of 37%. Yesterday, the sector tacked on another 1.1%.

Daily Summary: The Dow Jones rose 0.4%, the S&P 500 edging up 0.64%. The NASDAQ jumped 0.84%.

One of the stocks that stood out on the downside was Intel (INTC), which tumbled 3.4%. The company announced that due to a design failure in the company’s processors that were created last decade and which are in almost every computer there is the prospect of a large security breach. Intel released security updates which are expected to slow down computers using Intel processors by 17% on average. Intel’s competitor, AMD, was quick to announce that its processors do not have the flaw. In response, AMD soared 5.2%. NVIDIA (NVDA) soared 6.6% and Micron (MU) tacked on 3.3%.

About 7.1 billion shares traded hands on U.S. exchanges in comparison with the 6.3 billion average over the last 20 trading days.

Thursday: The Dow Jones closed yesterday at the 24,922.64 point level, as it quickly nears the 25,000 point level. The fact that the market opened so strongly is likely to attract more buyers, probability pointing to the gains spreading to other sectors.

Both the Dow Jones and the S&P 500 capped off the “Santa Claus rally” period successfully, i.e. with gains! A positive start to the year and January ending up are seen as an important indicator of the market’s yearly performance.

The period of a “Santa Claus rally” spans the 5 last trading days of the outgoing year and the first 2 days of the incoming year. There’s a clear tendency for this 7-day period to see market gains. Historically, the average gains over this short timeframe come out at an impressive 1.3%!

Some of the gains since December are linked to the new tax legislation, which significantly lowers the tax obligation of American firms – and which is expected to boost firm profits substantially. Analysts at Bank of America, on Wednesday, raised their forecasted earnings per share for S&P 500 companies by $14 to $153, as a result of the now lower corporate tax rate of 21%.

The analysts noted that companies with high tax rates and large local exposure will be the big winners of the legislation. The sector that is supposed to benefit the most is the consumer cyclical sector (XLY), with its projected earnings growth for this year now coming out at 14%, as opposed to 3% before the new legislation.

The Economic Diary today will be heating up before the critical job market figures are released tomorrow. Before opening today, the ADP survey for the private sector will be released at 8:15 N.Y. time. Initial unemployment claims will be released at 8:30. During regular trading, the PMI for the industrial sector will be released at 9:45 and weekly crude reserve figures will be released at 11:00.

Thursday’s Hot Stocks: INTC, TSLA, ZUMZ, MON, WBA

IPOs: None

Have a great trading day!

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