Last Trading Day Of 2018 Brings Amazing Surge

What an amazing spurt into the closing seconds of the last trading day of 2018. Just when it looked like buyers were done for the day, and already in Times Square looking for a place to watch the ball drop, stocks surged in the final four minutes of trading.

Small Caps

While all the major Indices were higher, it might have been the Russell 2000 that triggered the spark. The index made its move two minutes before the others, and it was the only index to close at the high of the session.

Keep in mind that last week, the Russell 2000 iShares ETF, saw the greatest inflow of funds, which increased assets under management by 2.27% to $41.0 billion. I’d rather stick to individual stocks; for those looking for small-cap exposure, I think this is going to be a big winner in 2019.

Blue Chips

The Dow Jones Industrial Average rallied almost 200 points in the waning minutes of 2018, led by what was the stock of the day.

I have been highly critical of Goldman Sachs (GS), which was an unmitigated disaster last year. Nonetheless, over the last two weeks, Goldman Sachs has exhibited quiet a resolve that could be a harbinger of a big 2019. The recent move could come from the same bottom fishing that has lifted the Russell 2000. However, I have to say that Goldman Sachs looks like the biggest value stock coming into the New Year.

• Bottomed: December 24^th at $156
• Forward (P/E) ratio 6.6
• PEG ratio 0.27

Broader Market View

It’s easy to say investors are still cautious because Health Care (XLV) was the biggest winner on Monday, but the index was led by biotechnology, which is notorious for booms and busts.

Consumer Discretionary (XLY) was paced by Best Buy (BBY), which has had more lives than an alley cat and a montage of brick-and-mortar names. Even though the expectations are higher after the initial data on holiday shopping, I think investors must have exposure to brick-and-mortar names. However, understand that more than any niche of the market, there are distinct winners and losers.

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Industrials (XLI) was led by Deere & Company (DE). Defense contractors also continued to look great. I was wrong about Industrials and Materials (XLB) last year, but the investment proposition hasn’t changed, and the value proposition actually becomes more attractive.

Technology (XLK) was interesting. None of the major names stepped up. Instead, Advanced Micro Devices (AMD) was at the top of the session. I think Technology will be higher in 2019, but it won’t be the best performing sector, nor does it have to be.

Consumer Services slipped as money rotated into other sectors. There are so many compelling names in the space with a lot of baggage or unanswered questions. For that reason, I think these stocks are better for trades or long-term holders. I am not worried about near-term risks and gyrations.

Individual Investors No Longer Neutral

For most of 2018, the majority of individual investors were more than likely to be neutral than bullish or bearish. I don’t think that’s the same as being indifferent, but it pointed to conflicts and insecurities that might have been more related to guessing when the longest bull market in history could continue.

In late July, the sentiment shifted to a majority of them being bullish but shifted with the market beginning in October. Interestingly, last week saw a spike in bullishness by more than 6% points, as it coincided with an increase in bearishness, lifting it to the highest level of the year at 50.3%.

Wall Street pros typically point to the individual investor optimism as a proven sell signal, but I don’t entirely agree with them. In fact, the pros miss a lot more than they capture, and perhaps, they spend too much time dissing individuals. However, I should point out that the last time The American Association of Individual Investors (AAII) bearish sentiment got above 50% was April 11, 2014, when the Dow was trading at 14,550. 

It made a pretty good move over the next several years.

That said, I like seeing some investors getting bullish during a market meltdown. 

December 2018 was among the worst month ever. It would be easy for individuals to throw in the towel, take big losses, and head for the nearest bingo parlor. We never know bottoms until long after they’ve been established, and there are millions of would-be investors still waiting for a retest of the March 2009 bottom to get back into the market.

Portfolio Approach

I’m champing at the bit, but understand cash is precious. Still, everyone should be ready to take advantage of the big market swoon because that’s what investors do: buy low and sell high. I’m most concerned with folks that took big hits on tax-loss selling, losing their appetite, or trying to get it all back on a Hail Mary approach to the market.

Don’t stick your head in the sand. 

Today’s Session

Investors woke up to more news of deteriorating economies around the world, including China, which saw manufacturing slip into contraction last month as new orders declined for the third straight month and backlog for the fourth straight month. 

China Caixin Manufacturing PMI 49.7

European manufacturing data was also abysmal and is now on the cusp of contraction as well.

Europe Manufacturing PMI

I love that the market has been tested and shown resolve since Christmas.  It must be tested over and over to establish a base and to shakeout weaker hands.  That said, volatility begets more volatility and more anxiety, so starting off with the Dow down three hundred points brings ever greater psychological pressure.