Santa Claus Rally Shows Up in Time for Christmas

(Please enjoy this updated version of my weekly commentary published December 23, 2021 from the POWR Stocks Under $10 newsletter).

Since last Thursday, the market action has been pretty intense. From Thursday’s close to Monday’s low, the S&P 500 dropped nearly 3%. From this level, it’s staged an impressive turnaround, climbing nearly 5% in the last 3.5 trading sessions.

One constructive development in this rally is the wide participation from small-caps to growth stocks to the mega-caps including the less liquid stocks that populate the universe of low-priced stocks.

This is healthy, and I’ve noticed that rallies that tend to be sustainable and durable have this characteristic, while narrow rallies are more prone to failure. A recent example is the breakout attempt in the S&P 500 to new highs in late November which happened while the Russell 2000 and many growth stocks were trending lower.

Not surprisingly, this breakout failed and led to a nasty reversal. Last week after acknowledging some of the bearish developments, I had written:

However, nothing has changed with the overall bullish market structure. The Fed getting more hawkish is a headwind and has affected certain parts of the market. But, it should be overwhelmed by the tidal wave of another quarter with more than 20% earnings growth.

Finally, the market is quite oversold and has reached certain bearish extremes that indicate good buying opportunities even in bear market conditions. And to top it off, we are entering the most seasonally bullish period of the year with the last 2 weeks of December and first week of January.

I believe that last week’s market action justified the decision to sit tight in terms of our overall portfolio exposure.

We did use the market weakness to improve the portfolio and increase exposure to some of the most powreful themes as we enter 2022.

Bounce or Rally

The next important question is whether this 5%ish move higher represents simply a bounce or a market rally.

Currently, I’m leaning towards the latter based on the strength and relentlessness of this move higher. But, I could see one more shakeout that would ideally form a higher low before we really do takeoff.

And, I can’t help but notice the strength in short-term rates which should keep moving higher based on the Fed’s hawkish stance, strong inflation data, and the Omicron variant turning out to be much less dangerous than initially feared.

As we’ve seen in the past, this development can cause weakness in parts of the market especially the overvalued, frothy growth stocks.

So, while I do think the broader market has bottomed and is ready to turn higher, some parts of the market are not out of the woods yet.

Thoughts on Energy

In the previous commentaries, we’ve talked about the sectors showing the most strength – materials, homebuilders, and semiconductors.

Since April, we’ve had an overweight position in energy and currently have a lower weighting with only one position.

Previously, I had more conviction, because I saw that supply was badly constrained, while demand was going to be stronger than expected.

Now, my perspective has slightly changed.

The supply situation is much better in the near-term. Companies are increasing production as has OPEC, and there are signs that the shale patch is coming back to life in fits and starts.

But in the longer-term, the supply problems remain. All of this increased production is just tapping oil that was already in production. We still are in a situation where we have underinvested in new oil production over the last decade, and this is certainly going to matter especially if oil demand can continue rising above 100 million barrels per day.

And, the demand side is what I think will drive oil higher into 2022 albeit at a slower pace than before. Yesterday was a milestone in that there was more air travel than at pre-pandemic levels. Gasoline consumption is above pre-pandemic levels as is miles driven.

All of these factors indicate that oil demand will surprise to the upside. In the short-term, supply can increase to match this demand but in the longer-term, I believe it will take much higher prices to generate a sufficient supply response.

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares were trading at $470.60 per share on Friday afternoon, up $2.91 (+0.62%). Year-to-date, SPY has gained 27.55%, versus a % rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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