Right now, the markets are gearing up for the annual Santa Claus rally that’s typically observed in late December and early January.

Historically, the market sees an uptrend during this time.

Over 70 years between 1950 and 2020, a Santa Claus rally occurred 57 times, with growth in the S&P 500 at 1.3%. Last year, from the final five trading days of December to the first two of January 2023, the S&P 500 rose 0.8%.

And this year, we could experience an unusual surge due to strong Black Friday and Cyber Monday sales.

Over 200 million consumers shopped during this period, exceeding the expected 182 million. This record-breaking turnout, driven by strong consumer confidence and favorable weather, sets the stage for a huge trading opportunity.

In addition, retail inventories are reported to be 10-20% lower on average, suggesting a more efficient approach to stock control. That’s according to several earnings calls I’ve joined in the past few weeks from various retail companies.

Notably, lower stock highlights better inventory management this year compared to last. Put simply, there’s less product sitting around on the shelves, and more being sold to consumers.

In particular, we should see a rally this year in consumer discretionary stocks, like those found in the Consumer Discretionary Select Sector SPDR Fund (XLY).

Online Sales Breaking Records

Adobe Analytics recorded a whopping $9.8 billion in Black Friday online sales, up 7.5% from 2022. Cyber Monday sales reached $12.4 billion, marking a 9.6% increase. These figures bolster expectations for a surge in consumer discretionary stocks (XLY) leading up to Q4 earnings calls.

Putting all of the above together, the market and XLY specifically are poised for a notable Santa Claus rally. This phenomenon, spanning just seven trading days, can significantly influence the S&P 500’s annual performance, setting a critical tone for the market’s trajectory.

But before this rally happens, the technical indicators I follow suggest a pullback lies ahead.

Take a look at this chart of the S&P 500…


Notice the Relative Strength Index (RSI) at the bottom.

Right now, we are beginning the pullback of 7 straight days of overbought conditions.

Before you panic, keep in mind pullbacks offer excellent buying opportunities.

And this is no exception, especially considering the strong retail sales and the potential momentum leading into Q4 earnings.

With a promising Santa Claus rally and potential pullback, timing the market becomes essential.

We are waiting for the final signal to show us the entry point of “buying this dip.”

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Tracking XLY: Past Recommendations and Future Strategies

Our S&P 500 sector performance predictor “SPY Hopper” has consistently highlighted XLY as a lucrative sector in the past few months. An initial buy-in at $157 in early November when we first told readers of the XLY breakout would have yielded a 9% gain by now.

The upcoming FOMC meeting on December 12-13, 2023 could provide the perfect catalyst for the anticipated pullback, offering a strategic entry point.

Ultimately, investors face two choices: sell consumer discretionary now, take the 9% gains and buy back in on the dip or keep XLY and just buy more during the anticipated upcoming dip.

With strong sales numbers, even if the S&P 500 dips three or four percent, XLY may hold up with anticipation of a strong Santa Claus Rally. I recommend keeping a position in XLY and adding to that position if XLY drops below $163

Leveraging data for you,

Brad Hoppmann
Analyst, Market Minute