Macro-Micro: The Man in Red

Friday marks the start of the end for 2017 – December is always that interesting month – questions about volumes, value, direction and new year forecasts come thick and fast.

The other major question that comes – Are we going to see a man in a red suit add some end of year magic into global markets?

Santa Claus or not – a degree of evaluation needs to remain at the front of thought for December. Over the previous five years December averages a 2.85% gain – strip out December 2013 and that average jumps to 3.42% – December consistently ranks in the top three months of a calendar year.

Reasoning is normally put down to the summer holiday period, lack of corporate shocks and confessions, a ‘set and forget’ investment mantra or just the psychology of the festive season.

Again – need to look at the opportunity versus the fundamentals.

Over the same five years, daily volume average is 2.6 billion versus the normal daily average of 3.2 billion. Caveat here is the half trading days preceding Christmas day and New Year day, which brings down the average substantially even so it is still ~22% below normal.

Then if you look at the daily value average for December of ~$3.6 billion versus the daily average for the year of ~$4.6 billion meaning December is ~16% below average. Suggests the ‘Santa Claus Rally’ is a bidder’s market and for those looking ultra-short term there is an opportunity in the low volume and value turnover.

Therefore; looking to Friday and 2017 December trading – are there comparisons to be drawn to previous years? Has the rally already been? First off 2016 needs to be put into context – The ‘Trump Bump’ saw November last year buck the November trend to finish up strongly.

The average movement in November is normally -2.1%, currently the ASX is up 1.23% in 2017 which includes three of the four big four banks turning ex-div. Compare this to 2013 and 2014 where November was weak and the argument could be these December were a buying the dips trading month rather than anything else.

Secondly – valuations; the ASX is currently trading on a P/E above the historical average of ~15x and earnings growth for the first half of FY18 looks pretty soft. After a mediocre FY17 a ‘double disappointment’ will have the fundamentalist out in force.

However the typical ‘confession season’ is January – meaning there is plenty of time for a Santa Rally then a rotation out if January flares.  I would also point out that at 17x 18x time earnings the ASX might be on the premium side however it is not 1 standard deviation away from the historical average and has been trading on a premium for over 14 months.

All in all – the man in Red appears likely to come for the kids and Adults alike.


Evan Lucas is an expert guest contributor to Fairmont Equities.

Evan is founder of The Lucas Review. Prior to that he was Market Strategist at IG. He is well known as an expert commentator in finance media such as Sky News Business, ABC1, the Australian Financial Review, CNBC, and Reuters.

Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.

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