Individual Stocks Set for Big Moves Thanks to the 'January Effect'
Government shutdown fears created excellent conditions for a snap-back bounce in the market.
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Worries about a government shutdown caused the market to drop sharply at the open on Friday, but it created excellent conditions for a snap-back bounce. Much of the market was already oversold due to the negative reaction to a surprisingly hawkish Jerome Powell.
The Fed cut interest rates by a quarter-point as anticipated on Wednesday, but Powell signaled that there may only be two additional cuts in 2025. The market had been pricing in four cuts before the Fed meeting, but now some economists are forecasting a rate hike by the end of next year.
This hawkish tone sent bonds lower and interest rates and the dollar higher. There was a broad selloff in equities on Wednesday, some mixed action on Thursday, and a rebound on Friday following a gap-down open. The close on Friday was a little weak due to the uncertainty of a government shutdown, but breadth was very good, with around 7,000 advancers to 2,500 decliners. All the indices were up a little less than 1%
With only five-and-a-half trading sessions left in the year, the big question is whether we will see a traditional Santa Claus rally. Conditions are good for a rebound in the stocks outside the Magnificent Seven since they have been struggling since late November, but conditions are very volatile, and there are always a number of factors in play in the last few days of the year.
Typically, tax selling pressure comes to an end in the last few days of the year, and this helps to fuel a bounce in some of the worst stocks, but there is also an inclination to do some liquidation and start fresh in the new year which often leads to an ugly day or two.
A Santa rally can be self-fulfilling to some extent as well. If smaller stocks start to exhibit some relative strength next week, then aggressive traders will pile in and make it happen. During the holidays, many of the big players have already closed their books for the year, which makes it easier for smaller speculative players.
My best advice for end-of-the-year trading is to focus on moves in speculative stocks rather than try to forecast what the indices may do. There will be some strong moves in individual stocks due to tax loss selling and the January effect.
Enjoy the weekend and finish that shopping. I’ll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
