The Market’s Math is Adding Up to A December Rally

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If you haven’t been watching, all three of the major indices have been moving sideways for more than a week. That comes after investors piled into stock following the better-than-expected inflation report a few weeks ago.

Please take note that I said investors above.

That consolidation has been boring.

About 28 years ago, my mentor taught me a simple rule about the stock market, “never short a boring market.”

But when you dig a little deeper, this market is anything but boring.

Let’s take a deeper look…

First Up – The Bond Market…

About a month ago, a few of Wall Street’s bond gurus put their names at stake by calling the end of the bean market for bonds. They may have been right. We’ve seen an impressive move higher in the bond market over the last month.

Market nerds like me have noticed that the S&P 500 and 20-year treasury bonds are now moving higher together for the first time in a “hot minute.” That’s a big deal.

Taking the “market nerd” level higher, gold and other precious metals are also moving higher now. Like the S&P 500, the SPDR Gold Shares (GLD) are within 5 percent of breaking into new all-time highs.

Right now, the S&P 500 appears to be locked in a simple waiting game as investors appear nervous about buying into a market that is sitting just 3 percent from breaking into new all-time high areas.

That appears ready to change as we turn the calendar to December.

Let’s face it, the last time they saw these prices was in July, just ahead of a 10 percent market correction. But this time is different. Here’s why…

Seasonality in November and December is Highly Tilted in the Bulls’ favor

This is true, especially after the type of action we’ve seen since the beginning of October. Markets that bottom in October often close at highs in December.

Let’s add this ‘market math’ up…

S&P 500 within striking distance of all-time highs

PLUS Bonds breaking to new intermediate-term highs

PLUS Gold ETF shares within 5% of new all-time highs

PLUS Strong seasonal “trade winds”

When you put all of that together, it looks and feels like a huge migration of cash moving from the sidelines into a relatively traditional portfolio allocation. Perhaps the first migration of cash of its type since the beginning of the bear market in 2022.

Remember that I made a point of saying “investors” above? That’s because this migration is going to be driven by investors moving money into the market, not traders moving money around the market.

There’s a big difference between the two.

Bottom line: A break above the S&P 500’s 4,600 level is set to spark a year-end “FOMO” (fear of missing out) rally that may tack another 5 to 10 percent of gains – on top of what has already been an unlikely bull market run in 2023.

Let’s take the focus back to the bond market for a minute.

Most investors are familiar with the 60/40 portfolio. It’s been a staple of portfolio management for generations of investors.

The approach is simple…  Allocate 60 percent of a portfolio to equities and the remaining 40 percent to bonds. It’s been the definition of a balanced portfolio, given its power to reduce risk while returning better-than-average gains.

Late 2022 media headlines laid claim to the death of this timeless approach.

The problem then was that both the bond and stock market fell into the hands of the bears in 2022. Put simply, the media and investors just couldn’t handle that pressure. Thus, they lost faith in this investing approach.

But remember, you can’t have diamonds without pressure.

Most investors, including Warren Buffet, know that the best time to buy is when everyone is running for the doors. Well, that’s what happened earlier this year. Now, we’re starting to see a titanic shift in sentiment as analysts are starting to get back on board with the 60/40 portfolio.

Mark my words, any swing in sentiment like this leads to historic opportunities in the market. You just need to know how and where to position yourself for the swing.

In all candor, I wish that I had seen this a few months ago.

But it’s not too late to take advantage of what could be a typhoon of money rushing into the market. Here’s one way I’ve positioned myself.

The Russell 2000 index is poised to break above its 200-day moving average.

That’s an important milestone for the market as it will confirm that investors’ risk appetite has increased during this historically bullish period of the year.

That “break” above the 200-day is your signal to jump in the Small Cap Express through the end of the year.

My expectations are that the Russell 2000 index will add another ten percent to its 2023 returns before December after it crosses above $180. Compare that to my target move of five percent on the S&P 500 and Nasdaq, and it’s easy to see that the small-cap iShares Russell 2000 ETF (IWM)is where you want to leverage the December rally.

There are three simple ways to participate based on a trader’s risk appetite:

  1. Simply buy the IWM shares. You’ll look to gain anywhere from five to ten percent over the next month’s trading by buying the small-cap index.
  2. Consider buying the Proshares Ultra Russell 2000 ETF (UWM). This leveraged ETF returns approximately double the returns and losses of the Russell 2000 index. It’s an easy way to leverage the small-cap index’s moves.
  3. For the more aggressive traders, take a look at the February expiration at-the-money options for the IWM. My check of the Black-Scholes option pricing calculator shows that a ten percent move before the end of December will translate into a 40 to 50 percent gain in these options.

As always, to your best trading success,

Chris Johnson

This article was originally published on this site