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• December 28, 2016, 1:04 P.M. ET

Bad Santa: Dow Drops, Nasdaq Slumps as Rally MIA

 

By Ben Levisohn

Stocks are slumping today–and Dow 20,000 looks even farther away.

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The S&P 500 has dropped 0.7% to 2,253.69 at 12:59 p.m., while the Dow Jones Industrial Average has declined 74.12 points, or 0.4%, 19,870.92. The Nasdaq Composite has fallen 0.8% to 5,444.69.

Rhino Trading’s Michael Block contends we’re one Donald Trump tweet away from Dow 20,000:

Yesterday I went on Fox Business and talked about what challenges this market may face next year, and I also joked that maybe if we all stopped talking about Dow 20k, maybe that august average would finally get there…All joking aside, I have two questions. First, why do we care about the Dow? Institutions sure don’t use it as a benchmark. The only reason is that my pals in the mainstream media are talking about it, and therefore, it has mom and pop and Billy and Suzy talking about it, so when the Dow gets to that big round number, it will likely inspire confidence in the markets and money will come marching back in from the aforementioned individual investors. That could mean single stocks or mutual funds or ETFs. Any of that could inspire a chase for performance among institutions, and there you have it. There’s your January rally.

Second, how will the Dow get to that big magic number? Well, the six biggest stock weightings in the DJIA are: Goldman Sachs (GS), 3M (MMM),International Business Machines (IBM), UnitedHealth Group (UNH), andBoeing (BA). What you will notice looking at a day like yesterday is that tech led the way sector wise. If the Dow is going to outperform, we need mega caps to outperform. We need those six stocks to outperform. So we need a day where financials and industrials outperform to get there. Given the trends in sector leadership, that is bound to happen…We are one Trump tweet talking about how yuuuuuuge Goldman Sachs is away from 20k.

In a note published Sunday, Oppenheimer technical analyst Ari Wald worries about what happens if the Santa Claus rally fails to show this year:

Popularized by the Stock Trader’s Almanac, the Santa Claus Rally (SCR) is the seasonal tendency for equities to rally during the last five trading days of the year through the first two trading days of the New Year. Since 1928, the S&P 500 has averaged a 1.7% gain and traded higher 77% (68 out of 88 years) of the time through this seven-day period, vs. a 0.2% average gain and a 56% success rate during any seven-day period. This year’s “Santa Clock” started December 23 rd and ends January 4th.

However, performance in the next 1-2 quarters has tended to be below average when the S&P 500 closes lower during the SCR. For instance, the S&P 500 has averaged a 1.2% loss in the subsequent three months following a negative SCR vs. an average 2.8% gain following a positive SCR. Hence the saying, “If Santa should fail to call, bears may come to Broad & Wall.”

Last year’s 2.3% loss marked the fifth time performance during the SCR period was negative over the last 20 years (1999, 2004, 2007, 2014). Following last year’s negative SCR, the S&P dropped 7% in the first month and closed with a modest 1% gain over the full three-month period.

The good news: There are still four more days for Santa to arrive.