December Melt-Up

I hope everyone is having a good holiday season as the S&P continues to push higher into the end of 2019. The best reason I can identify the cause is the chart below. Currently, the Fed is increasing the size of its balance sheet to keep the overnight lending markets liquid for the banks, however, the by-product of this program is that this money also finds its way into the stock market.

The second best reason is the positive seasonality that is strongest in the month of December. Stock traders refer to this as the Santa Claus rally as thinly traded markets levitate higher. The upward seasonality pressure lasts into January where new money comes into the stock market. It doesn’t play out this way every year but we are seeing it now.

However, there is a parallel to the top formed in January of 2018 (see below). From early October in 2017, the S&P rallied 13.47% in 79 sessions and gave it all back in 10 sessions after the January 21st top in 2018. The sharpest part of the rise happened in the 19 sessions that preceded the top (+7.5%) that started in December.

Looking at the 5Yr chart below, I have highlighted the run to the 2018 top with a yellow arrow that fits nicely with the most recent move from the August low of this year. Also, the technical indicators below indicate an overbought condition just like the January 2018 top. Combine this condition with the sharp rise over the last several weeks and you have a recipe for a corrective move sometime in the near future.

Chart of the Week!

Saudi Aramco finally went public with the world’s largest IPO on December 11th. However, from a historical perspective Saudi Aramco would still not be the world’s largest company ever. The visualization below looks at the most valuable companies of all time, measured by their market capitalization. (howmuch.net)

Economic & Central Banking Snippets 

• The labor market is showing more signs of tightening as average hourly earnings increased 3.1% in November for all workers, according to data from the Department of Labor. Data from the Atlanta Federal Reserve indicated that wages of people in the bottom 25% of earnings rose 4.5%, even more than the 2.9% of those in the top 25%. This shows that the market for low-wage jobs is tightening, not just that for high-paying jobs. (Investopedia)
• Core durable goods orders in November rose .1% m/o/m as expected but are down 1.1% y/o/y. Orders for vehicles, computers, machinery and metals all fell while those for electrical equipment rose over the last year.
• According to Mastercard SpendingPulse, holiday retail sales rose 3.4% this year with e-commerce growing 18.8% to make up nearly 15% of total holiday retail spending. (Investopedia)

Macro Snippets

• The SEC is investigating German auto manufacturer BMW. According to The Wall Street Journal, the U.S. regulator is looking into whether the company manipulated sales figures by having dealers register cars as sold when they were still present in car lots. (Investopedia)
• Tesla confirmed that it has secured loans from Chinese banks to build its Gigafactory Shanghai in a new filing. This includes a secured term loan facility of up to 9 billion yuan and an unsecured revolving loan facility of up to 2.25 billion yuan. The company has said it will begin delivering its China-made vehicles on Monday. The Model 3 sedan has also won exemption from the 10% purchase tax in China, according to official documents. (Investopedia)

Happy New Year and thank you for being a subscriber! 

Regards,

Paul J. McCarthy, III

President – Kisco Capital