Passing of the Fiscal Cliff issue reduced a major uncertainty in equity markets and equity prices responded accordingly.Political issues impacting equity markets likely will calm down between now and Inauguration Day. Thereafter, major issues including tax reform, the end of sequestration and the debt ceiling raise their “ugly heads”. The Fiscal Cliff resolved some of the easy political issues. Now, the hard part of political compromise begins and it will not be pretty.
Fourth quarter earnings reports start to become a focus this week. Reports start to trickle in. Consensus is an increase on a year-over-year basis of 6.0% for S&P 500 companies and a 3.0% increase for the Dow Jones Industrial Average companies. CEOs of major companies like to give good news to shareholders when they release fourth quarter and annual results (share splits, share buy backs, etc.) as well as an encouraging outlook for the following year. However, given the current state of political instability in the U.S., outlook comments may be less favourable this year. Traders will watch closely to reactions to these reports.
Beyond the political crisis during the next three months, equity market prospects are much more attractive assuming a reasonable political settlement is reached. Corporation on both sides of the border continue to hold large cash positions and are waiting for political stability before making major commitment to capital spending.
An added positive factor for equity markets beyond the first quarter of 2013 is news from the Federal Reserve that $85 billion asset purchases by the Fed may end before the end of 2013. The news quickly pressured Treasury prices and raised the likelihood that long term Treasury prices have passed their peak. A downtrend in bond prices as the year progresses will prompt investors to switch from bonds to equities. Following is a link to a report released on www.cnbc.com over the weekend entitled, “Why Goldman thinks you should dump bonds now”. http://www.cnbc.com/id/100355153
History shows that the weakest three month period for U.S. equity market is the three month period in the year after a U.S. president is elected. This the period when the President tries to implement the most difficult programs promised prior to the election. History is repeating.
Technical analysts are warning about a possible significant correction in the first quarter. Following is a link to a comment released late Thursday by Mary Ann Bartels, Merrill Lynch’s technical analyst: http://www.cnbc.com/id/100353125
Economic reports this will have limited impact on the market.
Short and medium term technical indicators for most equity market and sector indices show that prices currently are intermediate overbought, but have yet to show signs of peaking.
Santa Claus was generous this year to investors who held during the December 15th to January 6th classic Santa Claus rally period. However, Santa Claus exited the scene on Friday.
Sectors with positive seasonality at this time of year continue to outperform the S&P 500 Index and the TSX Composite Indexincluding Agriculture, Forest Product equities, Industrials, Semiconductors, Biotech, Europe, Copper and Base Metals. However, most of these sectors reach a short term peak in the first half of January. Sector rotation became apparent late last week when new sectors such as energy began to show outperformance for the first time in months.
The Bottom Line
The “hoped for” short term stock market spurt triggered by a favourable resolution of the Fiscal Cliff has provided an opportunity to take profits on strength on a wide variety of seasonal trades (e.g. agriculture, technology, semiconductors, biotech) and to rotate into other sectors that have a history of outperformance during the January to April period (e.g. energy, platinum, copper).
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Following is an example:
Ten year seasonality study on the TSX Energy Index
…….see 45 more charts and analysis on Don’s Monday Report HERE
