December Starts Slow And Gets Hot, So Get Ready To Buy Stocks

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Includes: DIA, IWM, QQQ, SPY, VTI
by: Markos Kaminis

Summary

Historically speaking December outperforms all other months of the year.

Yet, over the last decade the S&P 500 has only averaged a gain of 0.2% in the first half of December.

End of year drivers are likely behind the discrepancy and should have stocks setting up now at bargain prices for a Santa Claus rally.

Historically speaking, December is the best month for stocks, but on a weekly basis, the current period has not shown to be so hot. Over the last decade, December has had a slow first half of the month and yet it's the best month in terms of performance historically speaking. There are end of year factors at play, but they turn in our favor as we pass the midway point of the month. This gives us reason for optimism.

A couple weeks ago, I caught a market player answer a question about seasonality in December in a curious manner. He was asked about December's seasonal strength, but his response was to say that the start to the month tends to be shaky. Yesterday, another trader said that this current week tends to be negative. But we know that December is a positive month historically speaking, so what gives?

It appears there are tax drivers at play here for some institutions (many have different fiscal year-ends than December) and for all individuals. So, many investors are taking tax losses now, some with plans to buy back the same shares in 30 days after wash sale rules allow them to do so without losing the benefit of the tax loss. If you sell on December 1st, then you can buy the stock back at the start of January. It effectively allows you to maintain a position and take some tax benefit on your losses at the same time.

So why are winners selling off then as well? I suppose investors who have big gains in some names and are watching those gains dissipate now are panicking and locking those gains up. You can do that and match the capital gain against capital losses in other stocks in order to avoid tax consequences. So what we have is a cascading sell-off. Still, there's reason for optimism as we pass the middle of the month.

Over the last three years, the first half of December has been bad for stocks, even posting negative performance. Over the last ten years, the S&P 500 has only been up 0.2% on average through the first 15 days of December. Here are the last five years of first half December performance for the S&P 500:

S&P 500

Dec. 1 - Dec. 15

2013

-1.7%

2012

-0.2%

2011

-2.3%

2010

+2.4%

2009

-0.1%

Yet, historically speaking, we know December outperforms all other months on average. December has put together an average gain of 1.62% since 1950. That marks the best performance of all monthly tallies. How can this be considering what we see happening now?

Everyone is not trading at the same exact moment for tax reasons, some have already sold and will be able to repurchase sooner than others. As a result, selling pressure will begin to ease as time passes, and will eventually turn positive as institutions and other investors seek to snatch up bargains. But I do not expect the turn to be smooth. Rather as fear causes a sell-off, greed should drive fast buying in bargain stocks.

Stock Sector

December Thru Morning of 12-09-14

SPDR S&P 500 (NYSE: SPY)

-1.4%

SPDR Dow Jones (NYSE: DIA)

-0.8%

PowerShares QQQ (NASDAQ: QQQ)

-2.4%

iShares Russell 2000 (NYSE: IWM)

-0.9%

Vanguard Total Stock Market (NYSE: VTI)

-1.4%

The SPDR S&P 500 was down roughly 1.4% as I scribbled this on the morning of December 9th, with a great many names in the red. I'm seeing high flyers down further than the broader market, with the shares of Tesla (NASDAQ: TSLA) and Apple (NASDAQ: AAPL) for instance seeing selloffs of 13.8% and 6.5% month-to-date, respectively.

This decline may have more room to run, but when it turns I expect it to turn powerfully, with bargain stocks drawing capital back in like a door-buster sale draws in shoppers. So, investors in the market and the SPDR S&P 500 market tracker should stay optimistic here and look for entry points not the exits.

Disclosure: The author is long AAPL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.