2024 bows out: Santa rally ghosts Wall Street, Algos run the show, and investors brace for 2025 surprises!

Things you need to know.

- Santa appears to be ‘asleep at the wheel’ – Stocks continue to decline.

- Bonds rally a bit – could they be entering the ‘interesting zone’?

- Oil up, gold flat, Dollar kissing a high.

- It’s NYE – go enjoy yourself, it will all be here on Thursday.

 

Welcome to the final trading day of 2024…. Amazing, isn’t it? Where did the year go? One of the joys of the holiday season is the opportunity to say thank you’ and to wish you all the best for the new year. May Peace, Joy, Health, Wealth and Happiness be yours during this holiday season and throughout the new year. I look forward to what 2025 will bring for us and I will be here with you as we move through the year. Take good care – Kp.

“A banner year for US stocks is ending poorly as a retreat in tech stocks extended a stretch of losses that began when the FED cooled expectations for interest rate cuts two weeks ago….” Reported by Bloomberg yesterday as they tried to make sense of the weakness.

So, that ‘relief rally’ (many refer to is as the Santa Rally) that began on December 20th ended on the 24th….and is nowhere to be found….in fact – stocks took a hit on the 26th, 27th and again yesterday on the 30th. The Dow down 420 pts or 1%, the S&P down 64 pts or 1.1%, the Nasdaq gave back 235 pts or 1.2%, the Russell lost 16 pts or 0.75%, the Transports gave up 144 pts or 0.9% while the Equal Weighted S&P lost 52 pts or 0.75%.

Recall what I have been saying all along, I said – valuations seemed a bit stretch, I said that I think the FED has made a mistake, they have cut too much based on what the data tells us and I said that inflation is beginning to rear it’s ugly head. Note the key inflation measures – PPI, CPI and the PCE are all starting to tick HIGHER. Bonds have cratered as yields surge…. The 10 yr is up 100 bps since JJ cut rates by 100 bps starting in September. The dollar is kissing new highs, while Oil and Gold churn in a tight trading range. Oh, and the labor market is not crashing! And so, what I think is happening is that stocks are re-pricing – as investors digest the information, and when volumes are muted, and participants are away – the re-pricing is amplified and can feel a bit uglier.

Now before you get your panties in a bunch – understand – all of the action is being driven by algo’s. Asset managers are away from their desks, the retail trader is still celebrating the holidays. Remember – Algo’s operate on mathematical formulas. They don’t pay attention to price or tone – they are not married to any position…..…all they know is what they are programmed to do…so when a stock or an index hits and breaks a ‘defined level’ they go into ‘sell mode’- no discussion, they just go into sell mode…..and when that happens, the buyside algo’s pull back as well, because when those same ‘defined levels’ are broken, the buyside algo’s cancel and move lower – leaving a void in prices that causes swift moves lower. And by the way – that’s good for the buyside algo’s…. They aren’t getting run over.

And by the way (again) – the same is true when stocks pierce ‘defined levels’ to the upside - that causes the buyside algo’s to go into ‘buy mode’….then the sell side algo’s cancel in line offerings and move supply to higher levels – forcing the buyside algo’s to pay UP for stocks. But what makes it all more unnerving – is the moves are amplified because there are less participants and volumes are lower. So, is it uncomfortable? Sure…. But let’s not burn the house down – the indexes are still up double digits – the Dow +13%, S&P + 23.5%, Nasdaq + 30% and the Russell 10%...

Now the Russell is in a curious spot, it is up 10%, but it is also down 9% from the November high, putting it almost in ‘correction territory’. In fact on the 20th – it entered correction territory for a swift minute only to rescue itself by days end….It has now breached both the short term and intermediate term trendlines – leaving it just 60 pts or 2.7% away from its long term headline – which would represent a 12.7% move off the high and if that happens then it will be solidly in correction territory.

I am not convinced that the pullback of over…...I still think there is more work to do for markets…. Recall that November gap that we have been discussing – you know the one created on November 6th? Yeah, we still need to fill that and that means the S&P would need to trade down to 5783 – or 2% from here….

Every major sector lower again….…..Consumer Discretionary XLY lost another 1.6%, Tech XLK – 1.3%, Communications XLC -1%, Real Estate XLRE – 0.5%, Industrials XLI and Financials XLF lost 1%, Consumer Staples XLP, Basic Materials XLB and Healthcare XLV all lost 1.3%, Utilities lost 0.4% while Energy was the winner – closing just a hair below the unchanged line.

Homebuilders XHB – 0.4%, Retail XRT – 1.6%, Airlines JETS -0.5%, Disruptive Tech ARKK – 2.8%, Semis SOXX – 2%, Metals & Miners XME – 0.75%, The Value Trade SPYV – 1.1% while the Growth Trade SPYG – 1.1%. The S&P Small Cap 600 ‘growth’ trade - IJT losing 0.7% while the S&P Mid-Cap 400 Value – IJJ gave up 0.75%.

And as you expect – when stocks decline – the Fear Index surges – the VIX +9% and that sends the contra trades higher! The DOG + 1%, PSQ + 1.4%, SH + 1.2%, VIXY + 2.1%, the SPXS (Direxion S&P triple levered short) +3.3%.

Now - bonds advanced – the TLT and TLH up 0.8%, while the AGG gained 0.4%. 10 yr bond yields fell by 9 bps to end the day yielding 4.53% while the 2 yr is yielding 4.24% down 8 bps. I think some of that is just bargain hunting as 10 yr yields are high and the TLT is down 11.5% ytd – putting it in correction territory - and the TLH is off 7.8% ytd. Some analysts are suggesting that the chart suggests that bond market is about to ‘reverse hard’ to the upside and if that happens, then yields would plunge and stocks would surge…. Hmmm... At some point I would argue yes, but I want to wait to see what the next round of inflation data suggests (PPI on the 14th, CPI on the 15th and the PCE on the 31st)…and then what that does to the Fed’s narrative.

Oil rallied a bit…. up 51 cts at $71.11. Now, last week we pierced trendline resistance at $69.70 – but kept testing it to see if resistance became support. Apparently, oil traders are confident that it is….and so they go all in taking oil higher. In addition – China reports that factory activity has expanded for the 3rd month in a row – suggesting signs of a recovery. -and that is seen as a bullish signal for demand. Now, we are just 80 cts away from the October high of $72….and $1.60 away from long term trendline resistance at $72.70. This morning – oil is up 40 cts at $71.50.

Gold is trading at $2623 – up $5 this morning…. but still within the $2600/$2700 trading range that we have been discussing. It is up 20% ytd – that is nothing to sneeze at. Recalling that the street remains bullish on gold- the majors including JPMorgan, Goldman Sachs, and Citigroup, forecast $3,000 gold by the end of 2025. They cite the usual factors – Monetary policy, geo-political tensions, central bank purchases and ongoing economic uncertainty.

US futures are up this morning…. Dow futures are +90 pts, S&P’s +18, the Nasdaq +85, while the Russell is +8. Yesterday’s Pending Home Sales came in better-than-expected m/m at +2.2% vs. the expected +0.8% - but missed on the y/y growth – coming in at +5.6% vs. the expected +7.9%.

Now, due to the holiday – the very important NFP report that usually comes out on the first Friday of the new month – which is January 3rd is not due out until January 10th – which is next Friday….then we get both the PPI and CPI and then it’s earning season all over again – it officially begins on January 15th with he release of Big Bank earnings from JPM, C, BK, GS, WFC – all hit the tape. So, get ready to digest all of the forward guidance that we are all about to hear…. Will CEOs be bullish or cautious? Here’s a taste -

Analysts project a continuation of the earnings growth we saw in 2024. The S&P 500 is expected to report earnings increase of approximately 7.5% y/y for 4Q 2024, accompanied by a 4.7% rise in revenues.

Technology: it is expected to see robust earnings growth, driven by ongoing advancements in artificial intelligence (AI) and sustained demand for semiconductors.

Healthcare: it is projected to lead to earnings growth, with an estimated increase of 19.1% year-over-year. This surge is largely due to the pharmaceuticals industry, which is expected to report a 50% earnings growth, contributing significantly to the sector's performance. If that is true – then look at the PPH – the VanEck Pharma ETF – it is up 7% ytd (underperforming the broader mkt) but is off 13% from the August high – putting it in correction territory….leaving it below all 3 trendlines but seeming to find a base at the $85 level. Names in that group include LLY, JNJ. ABBV, NVO, MRK, PFE, AZN.

Financials: we are expected to report a 10.7% increase in earnings, with banks benefiting from improved net interest margins and a stable economic environment.

Energy: In contrast, it is projected to face a decline in earnings by approximately 20.7%, reflecting lower oil and gas prices compared to the previous year. Energy has been another underperformer in 2024 - the XLE up on 0.8% ytd.

European markets are higher by about 0.2% - 0.5%. Year end performance shows Germany in the lead at +18%, Spain + 14.5%, Italy + 12.6%, the Euro Stoxx is up 8%, UK +6% while France suffered a loss – closing the year down 2.5%.

The S&P ended the day, down 63 pts at 5906. Again, you know how I feel. It’s been a good year – if you were in it and were well diversified, Santa left you plenty under the tree. Next week is a new year and for those that are just starting out – start out slow, create a plan and be methodical. For those of you who are already in it, continue with the plan and remain strategic.