Are we out of the hole yet?
A few key pieces of evidence suggest that the stock market may have already embarked on its traditional Q4 rally. (Since 1989, the S&P 500 has gained about twice as much in the fourth quarter as in the next-best trimester, Q1.)
On the plus side, it’s encouraging that stocks have now registered three powerful up days since the September 28 closing low for the S&P: Wednesday and Friday last week, and especially Monday this week.
Amid Monday’s bounce, share volume in advancing NYSE stocks steamrollered declining volume by a massive 16:1 margin.
Urgent buying on Monday’s scale, particularly after a market slide that had dragged on for several weeks, implies that sellers have pretty much exhausted themselves. And indeed, Tuesday saw a mixed day across the board.
Another hopeful omen: Energy stocks, including the battered master limited partnerships, have snapped back, helped along by a rising oil price. West Texas crude settled today above $48 a barrel for the first time since late August.
As you know, the energy sector has put a drag on the stock market all year. If that headwind is fading (and perhaps even turning into a tailwind), it will be a lot easier for the broad-based equity indexes make up lost ground during the final three months of 2015.
At the same time, some doubts remain. We’ve been looking for the headline indexes to make at least a marginal break below their August 25 closing lows. On September 29, the NASDAQ Composite did slightly undercut that benchmark, but neither the Dow Jones Industrial Average nor the S&P 500 has done so.
Close enough?
Maybe.
If the NYSE advance/decline line can continue to forge ahead the way it has done in the past week; if junk bonds (HYG) continue to perk up; and if the incoming economic numbers continue to signal expansion (watch those jobless claims!), Mr. Market may well hand us a very pleasant Q4 surprise.
As far as strategy is concerned, I advise fund investors to wrap up any intended purchases between now and October 15, preferably on down days. If you’re picking individual stocks, focus your new money on healthcare.
Healthcare stocks endured another bout of selling today as echoes of Hillary’s price-gouging charges reverberated down Wall Street. I suspect, though, that this worry will dissipate as the general market rebound gathers steam in November and December.
Furthermore, the healthcare sector is now severely oversold and due for a bounce in any case. Take a peek at this chart from the folks at Bespoke Investment Group.
It shows that only 5.7% of the healthcare stocks in the S&P 500 index are currently trading above their 50-day average price. That’s the smallest proportion of any S&P sector. (Energy shares now rank as the third-strongest sector in the index!)
Best buys include drug maker AbbVie (ABBV) and diversified healthcare giant Johnson & Johnson (JNJ). Both stocks yield over 3%.
P.S. Despite a soggy market, McDonald’s (MCD) broke out to a fresh 52-week high Monday. Still moldering in my inbox is a December 9 email “alert” by one of the nation’s leading financial junk marketers, urging: “Don’t Go McBroke—Sell Fast Food Stocks Today.”
Since that handy contrarian buy signal was issued, MCD has jumped 14.5%, including reinvested dividends.
