December Market Tendencies

#TradeTalks: Further Improvement from the Equity Markets #2020Outlook

It’s hard to believe there are only a few weeks left in 2019, and barring a catastrophic meltdown in the market, this year will go down in the books as a strong year. It will likely to be the best since the 29+% returned by the S&P 500 in 2013.  The market has seen strong gains thus far in 2019, and evidence suggests that this trend could continue based on historical indicators.

According to the Stock Trader’s Almanac, the month of December is the single best performing month for the S&P 500 Index (SPX) and the Russell 2000 (RUT) (based on data back to 1950 and 1979, respectively). Furthermore, it is the second best performing month for other major market indices, such as the Dow Jones Industrial Average (DJIA) (using data from 1950), the Nasdaq Composite Index (NASD) (using data from 1971), and the Russell 1000 (RUI) (using data from 1979).

Only time will tell how December 2019 will ultimately play out, but half way through, the major market averages have just hit all-time highs.

While December 2018 bucked all of those historical trends, we enter December 2019 on much different footing.  The general trends of the major indices are positive and the US Equity market — from a relative strength leadership position — remains the highest ranking asset class.  Additionally, one of the more notable indicators we look at is the percent positive trend of the NYSE (PTNYSE), which measures the percent of stocks that are trading in an overall positive trend.   

At the end of November, the PTNYSE indicator crossed above the 50% level, closed at 52%, and exceeded the April 2019 high.  This is the first time the chart of PTNYSE has been above 50% since falling below in October 2018, before ultimately falling to a low of 26%. 

In looking at PTNYSE historically, a reading above 50% has been a healthy sign for the market as it suggests that a majority of stocks are in positive trends.  Further, in general, the magnitude of market movements have been much larger to the upside while this indicator is above 50% as more stocks are participating in the rally.  In the table below, we highlight the periods of time when the PTNYSE has been above 50% and below 50%, and compare the performance of the S&P 500 over those time periods.

Going back to February 1997 (which is as far back as we have daily data), this is the ninth time the PTNYSE has entered a period “Above 50%”.  During the eight periods above 50%, the S&P 500 (SPX) produced an average return of 18%.  There were only three negative periods (one in 1999, one in 2001 and one in 2002) where the SPX produced a loss while above 50% for the PTNYSE, and those were also the three shortest lived stays above 50%.  On the other hand, when the PTNYSE has been below the 50% level, the average return for the S&P 500 is just 3.66%.  So, this is not to say that the market can’t move higher while PTNYSE is below 50%, but historically the magnitude of market rallies have been much greater when the PTNYSE indicator has been above the 50% level.

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Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

Unless otherwise stated, the performance information included in this article does not include dividends or all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice. 

Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value.

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Nasdaq Dorsey Wright is a registered investment advisory firm with more than 30 years of expertise is technical analysis, specifically focusing on the steadfast relationship between supply and demand in the markets. Our research and tools help our clients see through the day-to-day clutter of market movements while providing a clear understanding of where market strength lies at all times.

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