On Monday, stocks could not quite decide how they wanted to react to last week’s meltdown. They started with a small pop higher, rolled over to the flat line midday, jumped again in the early afternoon, pulled back in the late afternoon and then finished with a spurt higher again.
The end result was a low-triple-digit gain in the Dow Jones Industrials that did not get back even a third of the Friday loss, and breadth measurements that were underwhelming at best. Over the whole market, only 113 stocks recorded a new one-year high, while 364 recorded new lows.
And among the new highs were virtually none of the typical major leaders, as the large-cap list was headed by the likes of Digital Realty Trust, Inc. (DLR), Extra Space Storage, Inc. (EXR) and Acuity Brands, Inc. (AYI).
There was no clear catalyst for the late-session gains, though details from an economic planning meeting in China were well received. All sectors were higher, led by telecom, which rose 1.1% as a group.
The rest of the week should remain quiet, with light news flow and volumes, since attendance will be scarce ahead of the Christmas holiday on Friday.
The few traders who are left were mostly talking about when the Fed might lift rates next. Basically, people want to know how fast to expect monetary policy to return to normal. In a Financial Times poll of 42 economists, more than two-thirds of the respondents expect another 25 basis-point rate increase at the Fed’s March meeting. Just over half of the 42 expect the third increase by June. That’s pretty fast.
As for sentiment, we are now heading into one of the most positive times of the year for stocks. You probably knew that. But what you might not know is that when the market sells off by 2% going into the last two weeks of December, stocks have tended to rise even more than they would normally.
Jason Goepfert of Sundial Capital looked at the 10 instances since 1962 when the S&P 500 sold off at least 2% in the three weeks heading into the Christmas break. If one bought the S&P 500 at that time and held through the third trading day of the new year, then the returns were positive every time except for in 1981. If the sell-off was 3% or more (close to our current case), he says, then the returns were +4.5%, +3.2%, +2.9% and +2.7%, respectively.
Even if those kinds of gains don’t materialize, the positive end-of-year sentiment and adjustments to retirement accounts should limit any potential losses. After the first few days of the new year, the positive effects of sentiment wear off — so don’t jump to any broader conclusions.
With that in mind, today’s trade is intended to keep seasonality on our side for short-term bullish profits.
Chip stocks tend to do really well at the end of the year and in January, and NVIDIA Corporation (NVDA) should be at the front of that parade. Nvidia started life as a premier maker of graphics cards for personal computers but has since branched out to become a major vendor of chips for all manner of objects that make modern life better, including mobile communications, self-driving cars and many “Internet of Things” projects.
NVDA jumped 2.3% on Monday as investors turned their focus back to the best stocks of the year. Buy NVDA at $33.40 limit, good till canceled. Set up to sell half at initial target $35.25, and hold the rest for further profits. Set a stop at $30.95, good after 10:30 a.m. ET only.
Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Follow him on Twitter for his latest take on markets and innovation.
