It looks like Santa Claus is on his way to stock investors in the week ahead

  • The anxiety over the omicron variant is lifting, and stocks could be setting up for a late-December Santa rally.
  • Stocks took off after a down session Monday and are ending the shortened Christmas week with a solid gain.
  • That positive tone is likely to spill into the coming week, barring any big negative news. Analysts say the thin volume could exaggerate moves in either direction.

After a period of turbulence, the decks may be cleared for a good old-fashioned Santa Claus rally in the week ahead.

Stocks were higher in the past week, after a rough stretch that continued into Monday. The S&P 500 recovered and is up about 3.5% for December as of Thursday.

"I think all the things we've been concerned about for the month of December to a certain extent, are in the rearview mirror," said Art Hogan, chief market strategist at National Securities. "We know what the Fed is going to do. We know while this new variant spreads faster, it's not as dangerous, and we know Build Back Better legislation is now 2022's business… I think the market can find a path of least resistance to the upside as we wrap things up."

The market has a lot of history on its side showing the year-end period is positive for stocks. According to the "Stock Trader's Almanac," the Santa rally period — the final five trading days of the current year and first two of the new year — is mostly a time when the stock market gains. The S&P 500 has been positive nearly 79% of the time on those days since 1928 and has gained an average of about 1.7%.

Add to that the fact that when the market has had a strong year, the momentum historically has carried into the final trading sessions. The S&P 500 is up about 25% for the year.

According to Bank of America, when the S&P 500 has already seen such solid gains, the final six sessions are positive. Since 1980, there have been 10 instances where the S&P 500 was up 20% or more going into the last stretch of trading and in nine of those years, it ended the final six days higher.

A notably rocky December

Stocks head into the final sessions of the year with a tailwind, after several weeks of choppiness.

"This has been the fourth rockiest December since 1987. The average daily move for the S&P 500 has been 1.1%," said Hogan. "That's a lot of action." The three more volatile Decembers were in 2000, 2008 and 2018.

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Hogan said volume in the last week of the year is typically 20% to 30% lower than normal. "In a low volume environment, when the market picks a direction, it tends to move in that direction in a robust fashion," he said.

Paul Hickey, co-founder of Bespoke Investment Group, said positive news on the Covid omicron variant this week was the catalyst that reversed the market's sell-off. There were studies showing omicron to be milder than other variants of the coronavirus. Further, the Food and Drug Administration approved pills from Pfizer and Merck for the treatment of Covid.

"Whereas the market was focusing on everything that could go wrong since Thanksgiving, people are now just taking a sunnier view,"Hickey said. He expects that view will likely pervade in the coming week.

"As we get toward the beginning of January, we'll see how markets are positioning themselves," Hickey said. He said investors will start to turn toward the upcoming earnings season, but they do not seem overly optimistic, meaning there could be scope for upside surprises.

"Going into the last earnings season, there was a ton of negative sentiment based on supply chains, inflation and labor shortages. We ended up having a decent earnings season. It's more mixed this time," Hickey said.

High-growth stocks hit

The selling in November and December dented stocks. Some high-growth stocks and ETFs were down sharply as investors rotated into safety plays. Funds that took their lumps in December include the Ark Innovation ETF and iShares Expanded Tech Software Sector ETF.

"I think some of these growth areas that have gotten hit hard will do a little better. They could see a bounce early in the year," Hickey said. "They sold off for a number of reasons. One was concerns over the Fed. Also people had made so much money, and the feeling was taxes are going up.. People were selling stocks ahead of higher taxes. That's more of a question now with a divided Congress."

In the past week, the fate of President Joe Biden's Build Back Better stimulus legislation was put in doubt when West Virginia Sen. Joe Manchin said he would not support it. Analysts expect to see further versions of the spending plan.

Bespoke's Hickey said January could be positive for stocks as well, and there could be opportunities for some stocks to bounce if they were hit by tax-loss selling.

"The January effect is a positive. All those tax-loss sellers that compressed multiples are buyers," he said.

Housing data

With the Federal Reserve forecasting three interest rate hikes for next year, economic data of all sorts is front and center for the markets.

The housing market has been a huge beneficiary of the Fed's near-zero rate policy, so all data on housing will be closely watched. On Tuesday, home prices data will be released. Pending home sales are to reported Wednesday.

David Petrosinelli, senior trader at InspereX, said the next big data point for the market will be December jobs, and he expects markets to be relatively quiet next week.

"Next week is generally a snoozer, the week before New Year's," he said. "All the action's going to come in the first week in January."

Week ahead calendar

Tuesday

9:00 a.m. S&P/Case-Shiller home prices

9:00 a.m. FHFA home prices

Wednesday

8:30 a.m. Advance economic indicators

10:00 a.m. Pending home sales

Thursday

8:30 a.m. Jobless claims

Friday

9:45 a.m. Chicago PMI

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