Date: December 11, 2018

Lots of Sectors Resist Decline & Many Seasonal Stats Point Higher

The correction in stocks technically continued through last week although I remain firm in my opinion that this is all part of the bottoming process that began in October. With each passing week, more and more bulls turn to bears and I feel like I am almost alone in my forecast that new, all-time highs will be seen in 2019. While higher prices will be accompanied by unusually high volatility, I do not believe that a rising tide is going to lift all ships this time around. The number of haves and have nots should increase significantly.

As four of the five major stock market indices are right around new lows, I think it’s telling that the NASDAQ 100 is not and bucking the trend. Additionally, a whole host of sectors are following suit, lending more credibility to my position that stocks are bottoming not accelerating to the downside. They include semiconductors, software, telecom, internet, discretionary, homebuilders, materials, staples, utilities, REITs, healthcare and biotech.

Turning back to the correction and bottoming process, it has now gone from being a simple one based on price action to a more complex one, not unlike the decline we saw in Q1 of this year. By “simple”, I mean that the decline unfolded in one or two legs to the downside and wrapped up in less than two month. “Complex” declines tend to bounce up and down, up and down several times over a period of more than two months. They also tend to suck in more and more investors who believe the decline is the beginning of a bear market which every decade or so does happen.

One of the differences between this decline and the Q1 one is that it is very unusual to have this kind of weakness this late in the year with this level of volatility. One day declines in December of 3%, like we saw last week, have only occurred in 1987, 2000 and 2008. The first instance led to the immediate re-launching of the great bull market. The second and third were during very ugly and nasty bear markets.

Let me throw another stat or two at you. When the first 11 months of the year are up, as 2018 has been, December has been up 20 of the last 22 years. I think most of us would gladly accept a breakeven month at this point, let alone finishing in the black. Furthermore, as points out, buying the first down week in December, like we had last week, almost always leads to a rally one to two weeks later. There are tons of other positive seasonal stats this time of year because it’s been one of the strongest seasonal tailwinds on record, especially in mid-term election years. So far, however, every single one of them is failing although there are still three weeks left in the year. Don’t count Santa out just yet!


Paul Schatz, President, Heritage Capital