One Warning Sign of a Risk-Off Christmas By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Risk is cooling off, but this name hasn’t stopped…
- The best gift if we get a Santa Claus rally…
- Health care’s December outperformance might begin soon…
- But that’s also a warning sign…
- TODAY: Free briefing on The Auspex Anomaly that beat the market 29-to-1. (Click here to automatically RSVP.)
Stocks kicked off the week with a stumble… As I write Tuesday morning, the S&P 500, Nasdaq 100, and Russell 2000 are all down this week. The latter benchmark, comprising the very exciting small-cap space, is actually now negative on the month. Other recent winners are hurting. Bitcoin, having played around at the $100,000 level for a week, is trading down at $96,000. Meantime, traditional risk-off precious metals are rallying and continuing their uptrends. (Hopefully you took action after our bullish gold call on Friday.) Days like today don’t sway my optimism. Instead, they urge me to seek the silver linings… the “bull markets somewhere” that folks are missing. Gold is one of them… but what about equities? I ran a scan to see which stocks are continuing win streaks right now despite the benchmarks’ stumble. And that lead me to the interesting case of Lululemon Athletica (LULU). LULU has put on a wild comeback in 2024. At one point in August, the stock was down by more than half from the start of the year. From that low, the stock is up more than 75%. That still puts it down about 20% for the year. But check out the chart: 
The stock happened to rise a cool eight trading days in a row. (It finally snapped its winning streak on Tuesday.) That’s a pretty rare streak for any stock. So, let’s put it to the test for LULU. LULU has put on an eight-day win streak just 13 times since it went public in 2007. You’d probably expect it to drop further. Well, you might be right, and you might be wrong. But odds are slightly against you if you’re bearish… - Five days after an eight-day win streak, LULU is positive 53.8% of the time for an average trade (wins and losses) of 0.2%…
- 21 days later, odds of a positive return rise to 58.3%, and the average return is 1.3%…
- But hold for three months, and you’re really cruising. LULU is higher 81.8% of the time after an eight-day win streak, for an average gain of more than 9%.
If you’re betting against LULU’s short-term momentum, that might work out. But don’t ignore the longer-term impacts of a quality stock in a rip-roaring uptrend. If Santa’s coming to town, he’s running a bit late… As we’re all seeing, stocks are a little fidgety to start off what’s traditionally one of the best months of the year. You could see that as a bad omen or as a buying opportunity. Given the strength of the bull market this year and the many decades of evidence pointing to strong follow-through returns, we’ll pick the latter. But let’s say you want to go shopping today and buy the best stock for the traditional Santa Claus rally. Which should you choose? Data always holds the proof… I scanned the S&P 500 for the best stock to own from today, Dec. 11, to Jan. 1, 2025. Here’s what I found: 
Get a load of CF Industries (CF). Over the past 18 years, this stock has been positive from today through Jan. 1 a vast majority (88.9%) of the time. Not only that, it posts the highest average trade result of 6.48% and the second highest average winning trade. That seems to cut both ways: It also has the highest average losing trade of the group at -9.87%. But again, you have to recall what kind of year we’ve been having. The bias is very clearly to the upside. And CF’s only two losing years were in 2022 (when it wasn’t yet clear the bear market was over, and December saw a nasty underperformance) and 2016 (which saw a choppy December across the board.) This list is a great trading resource for the weeks ahead. Keep it close by. Earlier this month, we noted that health care stocks are a key December trade… What followed was, naturally, a high-profile murder involving the CEO of the world’s largest health insurer, UnitedHealthcare. We talked a bit about UnitedHealth Group (UNH) on Monday, but let’s zoom out and look at the sector. Take a look at the ratio between the Health Care Select Sector SPDR ETF (XLV) and the SPDR S&P 500 ETF (SPY) below. Health care stocks have been in a downtrend against the broad market since the end of 2022. Since then, the sector has fallen from a ratio of 0.35 all the way down to less than 0.24 – by more than a third: 
This past November, the ratio chart fell below 20 on its Relative Strength Index (RSI, purple shading above). We haven’t seen this pair that oversold since April of 2019 – which was the only other time it’s been this low. And what’s even more interesting about this chart is how the RSI has made a higher low since then… a sign of positive divergence… and also has crossed above its 14-period simple moving average, giving it a buy signal. We showed you before that health care stocks tend to perform best in December. And among those stocks, Danaher (DHR) was positive 72.7% of the time over the past 44 years. The stock is a touch lower month-to-date right now, but that might prove a solid entry point for someone looking to take advantage of a potential resurgence in health care stocks through year-end. But there’s a catch to all this… strong outperformance in the health care sector can be a sign of risk-off attitudes. In the chart below, which compares the ratio of XLV/SPY (blue line) to SPY itself (red line), we can see health care stocks gained ground in late 2018 as the broad market suffered: 
They showed similar strength during the pandemic: 
And they were practically a mirror image of the S&P 500 during the 2022 bear market: 
All this leads me to feeling a bit cautious this month. If health care stocks do catch a bid here, it could be a sign that the Santa Claus rally brings a bit of coal along with a few presents. Today is a special day… Because, over at InvestorPlace, they’re bringing their Auspex strategy to a wider audience for the first time. Auspex was previously reserved for Luke Lango’s Inner Circle, bringing together all of his key concepts into one powerful stock screener. They align perfectly with our priorities here at TradeSmith, too: - Strong fundamentals – positive and accelerating earnings, revenues, and margins
- Strong technicals – rising moving averages, healthy relative strength
- Strong sentiment – higher trading volume as well as analyst estimates
Now Auspex is available all on its own, starting today at 1 p.m. Eastern during Luke’s Auspex Anomaly event. (Click here to automatically reserve your spot.) The beauty of the Auspex model is how easy it is to use. All the complexity of running 15 different filters is behind the scenes in Luke’s Bloomberg Terminal. All you have to do is invest in the top 10 fast-moving stocks that qualify for Auspex each month. Then, the next month, if any fall out of the top 10, just swap them out. It’s a five-minute process. That monthly rebalancing has been phenomenally effective. Luke’s been live testing the strategy since July, and it’s beaten the market every month since then. That includes last month, which saw one of the best monthly returns for stocks in years. But in his 20-year backtest, Auspex’s performance makes the stock market’s cumulative returns (664%!) look like a sideways line: 
To hear all about how, exactly, Luke developed a model that could beat the market more than 29x – and how to gain access to it – click here to automatically enroll in this afternoon’s Auspex Anomaly event. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
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