The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium Articles, Weekly Premium Articles, or All-in-One.
Included in this report:
- Year-to-date performance
- Weekly summary.
- Update on market positioning.
- Stock market forecast.
- Capital markets update.
1. Year-to-date performance
We use two long-only cross-sectional momentum strategies to generate signals for capital markets and factor ETFs. See Section 3 below for open positions and signal updates.
Year-to-date, the weekly strategies (WeeklyReport) are up 29.3% (equal allocation, no leverage) versus a gain of 28.3% for the SPY ETF. Gold (GLD) is up 27.8% year-to-date. The US dollar index (UUP) is up 11.7%, and long-duration bonds (TLT) are down 5.5%. The ensemble’s (WeeklyReport) beta over the last 10 years is about 0.28, and correlation with the S&P 500 index is 0.55. The Sharpe ratio is 0.90.
2. Weekly Summary (December 9–December 13, 2024)
- Stocks fell as breadth deteriorated and new worse-than-expected inflation data spooked investors.
- Large-cap stocks (SPY) fell 0.6% to end a three-week win streak.
- Gold (GLD) rebounded 0.6%, but the precious metal’s volatility increased.
- Long-duration bonds plunged. The TLT ETF fell 4.5% and nearly erased three weeks of gains.
- Commodities (DBC) gained 2%, primarily due to gains in energy.
- The US dollar index (UUP) rebound continued with a gain of 1.1%.
- Since January 3, 2022, bonds (TLT) have been down 33.2%, while gold and large caps (SPY) have gained 42.9% and 32.5%, respectively.
- During the week, the equally weighted Magnificent Seven stocks index gained 2.5%. TSLA and GOOGL surged 12.1% and 8.8%, respectively. NVDA fell 5.7%.
- All market sectors ended the week in the red except consumer discretionary. See below for more details.
- Palantir (PLTR), MicroStrategy (MSTR), and Axon Enterprise (AXON) will replace Super Micro Computer (SMCI), Moderna (MRNA), and Illumina (ILMN) in the Nasdaq 100 on Monday, December 23, 2024.
Sector ETF performance
Consumer discretionary stocks (XLY) gained 1.2%, following a gain of 4.7% the week before. Materials (XLB) and utilities (XLU) fell the most, by 2.9% and 2.6%, respectively. Year-to-date, communication services (XLC) are up the most, by 40.1%, while health care (XLV) has gained the least, by 4.5%. Consumer discretionary (XLY) is in overbought territory. Materials (XLB) are in oversold territory. Note that since 2022, energy (XLE) outperforms all sectors by a wide margin with a gain of 78%.
A Santa Rally?
As we demonstrated in an article this week, the Santa Rally has been more of a wish than a reality.
The stock market’s performance in the final week of the year and the first two days of the new year, particularly in the last five years, has been disappointing and has deviated significantly from the outliers seen in 1997, 2008, and 2018. Based on the analysis, this does not appear to be a valid seasonal anomaly. However, with the inclusion of MSTR in the Nasdaq-100, there may be a Santa Rally this year. We won’t assert that the inclusion of this highly speculative crypto asset in the tech index served this purpose. However, market breadth has deteriorated in the last two weeks.
Specifically, the cap-weighted S&P 500 index total return (SPY) has gained 0.3% in the last two weeks, whereas the equal-weight S&P 500 total return (RSP) has fallen 2.9%. Incidentally, the Russell 2000 total return index has plunged 3.6% in the last two weeks. The widening decline could be attributed to various factors, such as but not limited to:
- The Fed is making cuts while inflation persists.
- The public debt is rising exponentially.
- There is uncertainty about the new administration’s reforms.
- Geopolitical conflicts are spreading.
- There are reports of intense insider sales of equities.
As we have argued before, forecasts are impossible, especially about the markets. The sell-side forecasts about a rise in the S&P 500 index of about 10% for next year are of the “naive type,” which is a technical term for using the average yearly return.
In the last 80 years, the average yearly return of the S&P 500 index has been 9%, and the standard error is 3.61%. Since the yearly returns roughly follow a normal distribution, the 95% confidence interval falls between 5.4% and 12.6%. With T-bills yielding 4.3%, the 95% confidence interval yields 1.1%—8.3% above the risk-free rate. Therefore, we believe there is a rush to lower rates, even with persistent inflation. Note that this “ensemble” naive forecast approach ignores the high time-domain variability due to a standard deviation of 16.5%. If the approximate normality condition remains intact and the left tail of the yearly return distribution does not thicken, a low-probability minus 3-standard deviation move could lead to a loss of approximately 40% for the S&P 500 index. On the other side of the spectrum are the superoptimists, who are looking for a continuation of the rally and returns of more than 20% or even higher for 2025. Superoptimists are as detrimental as permabears, and superoptimism is a cognitive bias.
Since we have no ability to predict the future, we rely on proven long-term anomalies, such as cross-section momentum and price series forecasting. Those have the potential to provide signals for risk management purposes. For more details, see Sections 3 and 4 below.
3. Update on market positioning
The most recent update occurred on Friday, December 13, 2024, following the close of the market. The year-to-date, equally weighted performance is 29.3%. Below are the open positions and new signals.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: The Weekly Market Reports are provided for informational purposes only and do not constitute investment advice or actionable content. We do not warrant the accuracy, completeness, fitness, or timeliness for any particular purposes of the Weekly Market Reports. Under no circumstances should the Weekly Market Reports be treated as financial advice. The author of this website is not a registered financial adviser. Before subscribing, please read our Disclaimer and Terms and Conditions.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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