A consensus carried out from 1950 to 2015 has revealed that December offered positive returns in 49 years and negative returns in 17 years, with an average return of 1.54%, the best seen in a year, as per moneychimp.com.
But U.S. stocks may defy the seasonal trend this time around. Trump's victory in the U.S. presidential election in November and the subsequent stock market rally on hopes of fiscal reflation have now pushed the broader market into an overbought territory.
Stocks are now more prone to enter into the correction territory with the Dow-Jones based ETF (NYSEARCA:DIA) and the S&P 500-based ETF (NYSEARCA:SPY) having a relative strength index of 81.83 and 69.07, respectively. Also, market breadth readings, which indicate the ratio of stocks that are rising versus falling are also narrowing. The likelihood of Dow Jones touching the 20,000 mark is gradually going off the table.
This kind of market sentiment might make Christmas a little dull this year, curbing the natural progression of the end-of-season ascent, commonly known as the Santa Clause rally.
What is Santa Rally?
Santa Claus rally refers to the jump in stock prices in the week between Christmas and New Year's Day. There are several factors behind this surge including 'tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week' as per Investopedia.
In fact, some even believe that investors buy stocks during this period to cash in on another strong equity event, known as the January Effect, which takes place soon after. If we dig a little deeper, the consistency of this rally would be more visible.
According to the 2016 Stock Trader's Almanac, the Dow Jones Industrial Average has returned about 1.7% (on average) since 1896. However, the Santa Claus rally failed to live up to investors' expectation several times including in 1990, 1999, 2004, 2007, and 2014, per Business Insider.
Is There Any Chance of 2016 Seeing a Santa Rally?
With just a handful of days remaining for Christmas, it looks like that such a stupendous surge is less likely this year. This is truer given the 5.1%, 8.1% and 14.3% gains in the SPY, DIA and iShares Russell 2000 (NYSEARCA:IWM), respectively (as of December 19, 2016) since the election. After an ascent of this height, the fear of a stock market bubble is high. Billionaire Bill Gates also believes the same.
Still, "growth and inflation expectations are at five-year highs while global profit expectations are at six-year highs," as per Bank of America Merrill Lynch. Such optimism might make Christmas merrier. Plus, Trump is yet to take office and may thus keep the fire burning in the stock market, at least until he announces his policy formulations officially.
Investors should also note that America's millionaires are now betting big on the Trump rally. As per CNBC, 20% of millionaires found stocks more appealing due to the election. And the largest portion of millionaires expect the S&P 500 to shoot 5-10% higher in 2017. So, the possibility of a rally, no matter of what magnitude, can't be fully ruled out.
What About Low P/E Momentum ETFs?
This is why we suggest tipping toes into the momentum ETFs with a relatively low P/E. Momentum investing is an intriguing idea for those seeking higher returns in a short spell. Momentum investing looks to reflect profits from buying stocks which are sizzling on the market.
Below we highlight three momentum stocks and ETFs with a Low P/E to watch out for in the coming trading sessions. The below-mentioned ETFs and stocks have a P/E more or less the 17.73 times P/E of SPY.
Cambria Value and Momentum ETF (BATS:VAMO) - P/E 15.25 Times.
It is an active ETF which uses a quantitative approach to actively manage a portfolio of U.S. equities.
SPDR Russell 1000 Momentum ETF (NYSEARCA:ONEO) - P/E 17.17 Times
The fund looks to track the performance of a segment of large-capitalization U.S. equity securities demonstrating a combination of core factors with a focus factor comprising high momentum characteristics.
First Trust Dorsey Wright Focus 5 ETF (NASDAQ:FV) - P/E 20.31 Times
This ETF hovers around technical indicators such as relative strength. The fund is designed to identify the five First Trust sector and industry-based ETFs that are arguably expected to have the maximum chance of outperforming the other ETFs in the selection universe. Securities with high relative strength scores (strong momentum) are given higher weights.
For stocks, we have chosen top picks using the Zacks Screener that fits our three criteria: momentum score of 'A', stock Zacks Rank #1 (Strong Buy) and a P/E below 17.73. Here are the three recommended stocks.
AGNC Investment Corp. (NASDAQ:AGNC) - P/E 7.6 Times
It is an internally managed real estate investment trust with a dividend yield of around 12.09%. The underlying Zacks sector rank is into the top 13%, at the time of writing.
FutureFuel Corp. (NYSE:FF) - P/E 13.07 Times
The company manufacturers diversified chemical products and biobased products comprising biofuels and biobased specialty chemical products. The underlying Zacks sector rank is into the top 25%.
MannKind Corporation (NASDAQ:MNKD) - P/E 5.35 Times
It is a biopharmaceutical company with a Zacks sector rank in the top 25%.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.