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The last week of 2022 shaped up to be a disappointing one, similar to the whole of the year. With all the major indices finishing the year off quite lower than where they started. The S&P 500 ended down 18.2%, The Nasdaq 100 ended down 33.6%, and the Dow Jones Industrials ended down 8.6% .
The Santa Clause Rally never really seemed to kick off and Q3 earnings season is now over, with the next not starting for about two more weeks.
The major indices remained under pressure from continued weakness in some of the most beaten-up names this year. Specifically, mega cap losses accelerated this week on lingering valuation concerns and presumably tax-loss selling activity by participants who bought into the seemingly invincible stocks last year.
Some of the mega cap names aren’t so “mega” any more given the massive loss in market capitalization they have suffered this year. The Vanguard Mega Cap Growth ETF $MGK fell 0.3% this week and 34.0% for the year.
The Santa Claus rally period, which is the last five trading days of the year and the first two trading sessions of the new year, has gotten off to an uneven start. It is believed to be a good sign for how the new year will start when this period produces a cumulative gain over that stretch. 2022 was a definite exception to that belief. Recall that the 2021 Santa Claus rally produced a net gain of 1.4% for the S&P 500 and yet the S&P 500 declined 5.3% this January and 5.0% in the first quarter.
It looked like Santa Claus might come charging to town following Thursday’s rally. The S&P 500 closed the session just a whisker below the 3,850 level, where it has remained since mid-December, but then backed off again in Friday’s trade.
When this year’s Santa Claus rally period began, the S&P 500 stood at 3,822.39. The S&P 500 closed Friday’s session at 3839.50 after visiting the 3,800 level.
It was also a disappointing week in the Treasury market. The 2-yr note yield rose 10 basis points to 4.42% and the 10-yr note yield rose 13 basis points to 3.88%.
The bump in yields was another headwind for equities, particularly the growth stocks, which was the case all year. The Russell 3000 Growth Index fell 0.3% this week, and 29.6% for the year, versus the Russell 3000 Value Index which rose 0.1% this week and fell 10.1% for the year.
Separately, Southwest Air $LUV was an individual story stock of note after the airline canceled thousands of flights due to the winter storm. Tesla $TSLA was another focal point, trading in roller-coaster fashion. The stock hit 108.76 at its low on Tuesday, leaving it down 69.0% for the year, but managed to rebound and hit a high of 124.48 in Friday’s trade.
Only 3 of the 11 S&P 500 sectors closed with a gain this week in thin trading conditions. The financials sector rose 0.74%, the energy sector rose 0.47%, aided by a bump in oil prices above $80.00/bbl, and the communication sector rose 0.40%. Meanwhile, the materials and consumer staples sectors were the worst performers with losses of 1.07% and 0.84%, respectively.
The economic calendar was light on major releases this week. Featured reports included the November Pending Home Sale Index, which declined 4.0%, and continuing jobless claims for the week ending December 17, which hit their highest level since February (1.710 million). Next week will see many major releases that includes the December ISM Manufacturing Index, the December Employment Situation Report, and the December ISM Non-Manufacturing Index.
Dividend Dollars’ Opinion
That’s it for the recap. Now for my opinion!
Last week I was correct in not expecting any major move in one direction or the other. The SPX ended only 6 points lower this week than where it ended last week!
It appears that the Bear Market level is being confirmed as a key level of resistance. And with all major moving averages above the that level, there is not much happening in form of support below our level.
We have been basing at this level for 8 days, which makes me think the next move in either direction will be a significant one.
With the next earnings season still two weeks away and the next rate hike still about four weeks away, the dip buyers are likely to step in again, now that the tax-loss harvesting season has ended. Most people like to buy things when they are on sale, and right now the SPX is 20% off.
Data releases on the ISM Index and Unemployment next week could be the items that have the largest impact.
January will be the month the watch for next year. Given the end of tax-loss harvesting and the fact that we are a few weeks away from key economic data releases and the next Fed hike, I think bargain buyers could push the market higher for next week, or even the week after that putting the January Effect in full swing.
The January Barometer also shows that January overall will be the month to watch. The barometer is: If the Standard & Poor’s 500 market index ends January higher than it started, the rest of the year will follow suit, and vice versa. the January Barometer has registered only 11 errors between 1950 and 2021, giving the indicator an accuracy ratio of 84.5%.
With all of that in mind, I think we see a short-term bounce before possible drawbacks caused by earnings disappointments, Fed hike, and other key economic data bring the market down to a lower level in January.
That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.