One of my former bosses used to remind me on a daily basis that while history doesn’t necessarily repeat itself it sure tends to rhyme more often than people give it credit for.
And this gets me back to seasonality for stocks in the month of December. Through the seasonality lens US stocks tend to see some weakness into the middle of December before the “traditional” year-end rally takes place. So the million-dollar questions that I am pondering, and ones that will likely be answered next week are whether we will a) see seasonal patterns play out again for US equities in the second half of December, and b) whether some dollar weakness could lead to a big short squeeze in oil, oil-related stocks and the broader commodity complex.
The real tricky part this year is next week’s December 16 FOMC meeting. Fed fund futures are still clearly pointing to a first rate hike in eight years. The meeting coincides with the toggle point where stocks normally get the year-end bid. In other words, the FOMC meeting could well determine the fate of a Santa rally this year.
To shine some more light on this ‘December pattern’ that we ‘tend’ to see, below is the price action for December 2014. Note that from early to mid-December the S&P 500 pulled back about 5% in a fairly volatile fashion, only to abruptly stop the free-fall and start a sharp snap-back rally into year-end.
Thus far in 2015 we are witnessing a somewhat more complex pattern play out and while we are in a different place in the global economic cycle (i.e. economic growth rate of change slowing), we still can’t ignore that history tends to lift stocks from mid-December into the end of the month. This December thus far we are seeing what we refer to as an a-b-c correction and it is now all up to next week’s FOMC meeting on Wednesday and whatever spirits may want to lift stocks higher into the options expiration on Friday.
