Will There Be a Santa Claus Rally?

A wintry December is here (rainy for us Californians, thankfully). Will a Santa Claus rally appear?

Odds are likely, but it is not assured. In December, U.S. share markets trade a full-year 2015 earnings landscape -- and on a slosh of global money. Fair value computations price a firm 2015 earnings and revenue growth outlook.

Look forward. S&P 500 cyclical sectors produce annual 2015 EPS growth.

According to the latest macro post from the San Fran Fed, stock market gains have been an important feature of U.S. economic expansion.

The ratio of the Standard & Poor's (S&P) 500 stock market index capitalization to GDP is currently around 100% -- approximately double the value that prevailed at the market bottom in Q1-2009. While elevated, the ratio remains below the value of 126% that was observed at the market peak in Q1-2000.

On top of that, the ratio of New York Stock Exchange margin debt to GDP has risen sharply in recent years and is currently near all-time highs, signaling the increasing willingness of investors to buy stocks using borrowed money. Similar sharp rises in the ratio of margin debt to GDP in 1999 and 2006–07 were followed by major downturns in stock prices.

The cyclically adjusted price-earnings ratio (P/E10) for the S&P 500 stock market index is a metric that economist Robert Shiller has advocated to help judge whether the stock market is overvalued.

The ratio is computed as the real, or inflation-adjusted, value of the S&P 500 index divided by real earnings averaged over the 10 most recent years.

The current P/E10 ratio of 25.7 exceeds the long-run historical average of 16.6 but remains below the values of 32.6 and 44.2 observed at the market peaks in 1929 and 2000, respectively.

Similar to the P/E10 ratio, a higher bull-bear spread -- that is, the balance of bullish versus bearish individual investors from surveys -- also predicts lower future real growth in stock prices over the subsequent 10-year period.

Using the average historical relationship, the observed bull-bear spread in October 2014 would predict mildly positive real growth in stock prices over the next 10 years.

Again, however, there are many examples in the data that deviate from the average historical relationship on both the upside and the downside.

The strongest S&P 500 sectors are domestic Health Care and IT. Transports (Air, Rail and Trucks) look great. Xmas analyst earnings estimate upgrades showed up in Apparel, Leisure, Food/Drug Retail and Non-food Retail.

(1) Health Care remains the top Very Attractive sector. The clear winter leader is Medical Care. Medical Products and Drugs look Attractive.

This company provides inpatient behavioral health care services. It provides psychiatric and chemical dependency services too.

(2) Info Tech is the other Very Attractive sector. Look to Semiconductors and Computer-Office Equipment. Ranking upgrades here show business cap-ex spending picked up, and an end-of-year spending flurry has hit home.   

Idaho-based Micron is a provider of advanced semiconductor solutions.

(3) Consumer Discretionary is upgraded to an Attractive sector this month. Apparel, Leisure and Home Furnishings-Appliances look more Attractive after the oil price collapse and the emergence of Xmas season.

The Pantry, Inc. is an operator of convenience stores.

(4) Financials are Attractive. Look to cyclical Insurance and Real Estate.  

(5) Industrials are at the top of Market Perform. The Transports are Very Attractive. The leaders here are Business Products, Airlines (after the fall in oil deepened) and Railroads & Trucking.

(6) Telcos are Market Weight at best.

(7) Utilities are Market Weight at best.

(8) Consumer Staples are a Very Unattractive sector. Stay away from Beverages, Soaps & Cosmetics Agri-business & the Food industries.

(9) Materials are Unattractive. Stay away from Paper, Metals-Non-Ferrous and Chemicals. The exception is Building Products. That industry is hot.

(10) Energy is a Very Unattractive Sector. Coal is the worst-ranked sector across the board. The oil price collapse hit all the Oil & Gas industries hard. Stay away. There's a contrarian play: Energy-Alternates got an upgrade.

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