At the high of the year, the S&P 500 was up more than 28%. Yet after a bumpy and altogether negative December, we closed out the year up a mere 24%.
There may have been a few presents beneath the coal in the immediate aftermath of the Federal Reserve’s rate cut.
But ultimately, the Santa Claus rally didn’t deliver in 2024.
You won’t see me crying about it. It was yet another banner year for stocks after what was already an incredible performance in 2023, which took us out of the bear market and saw the market return more than 26%.
2024’s return was abnormal. But that wasn’t the only strange thing about it.
The December downturn, where the market fell -2.5%, was also somewhat unusual.
Going back 50 years, stocks have only dropped in December 15 times. Eight of those times have occurred since the turn of the century – curiously, a hit rate of 30% in both timeframes. And the average long-run negative December return is -2.8%.
We can do a few things with this…
The first thing is to simply look at what the market does in the year after a relatively rare negative December.
By isolating all the years following a December slump, we see that the average annual return to follow was just under 11% – a bit higher than the average of 9.8% for the past 50 years. And only 3 years out of 14 saw a negative return to follow.
We can tighten up the dataset even further, though. Looking at the handful of years in the past half-century where December drops were mild – at 2.5% or less, both below average and lower than last month’s – we get an average return of 7.47%.
That tells us that milder losing Decembers actually tend to put a damper on the year’s returns ahead.
Altogether, both looks lead us to a comforting conclusion: On average, stocks are positive the year after a red December. So if the volatility shook you, take a breath and keep the long view.
This may not be a “hat trick ” year of 20% gains or more… But it will probably be positive.
My colleague Mike Burnick agrees, suggesting to his Constant Cash Flow subscribers that “investors may want to curb their enthusiasm” just in case 2025’s gains are more in the 0% to 10% range. That’s the most likely scenario from his vantage point as well, in which he looked at forward returns after two-year gains of about 50% (like we had across 2023 and 2024).
I’m sure you had no doubt we’d keep slicing and dicing the data in 2025… And from what we see, we have another year to look forward to… just with our enthusiasm a bit more curbed.
But let’s really zoom in and see what we can do with the month ahead…
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Let’s look at the average January return after a negative December…
I went back to all those negative December years and looked at the return the following month. What I found is something of a mixed bag…
On average, Januarys after negative Decembers going back to 1974 see a win rate of exactly 50%, and an overall average return of 2.55%.
That puts the odds ever so slightly in favor of a win. But with numbers like these, the odds are much higher the market goes sideways for the next month. And that may prove to be just what the market needs to ultimately keep churning higher.
(Sidebar: If this holds, that makes the next month an excellent time to sell put options and covered call options. If you’re interested in some great data-driven guidance on how to do that with low risk, check out our options software suite here.)
Looking at the chart of the S&P 500 only supports this view. Remember, 2024 was a banner year for stocks. The “breather” we saw in December could well continue into the new year with a healthy consolidation.
Take a look at the pink box at the upper right of the chart below. That highlights the period between Nov. 1 – the most recent bottom for stocks – and the end of January. As you can see, the S&P 500 is still well above its long-term trend:
Starting back in the fall of 2022, the S&P 500 has been on a steady uptrend, with a brief shock lower a year after the bear market bottom.
This trendline shows us that we could fall as low as 5600 by the end of January and still keep the bull trend intact. In fact, if the S&P 500 closes 2025 right on the dotted trendline above, it’ll have gained 10.17% for the year – a more than respectable, above-average return that might just be appropriate after the tremendous gains in 2023 and 2024.
We can think of this as a “worst best-case scenario” for 2025. We want the trendline to stay intact. Ideally, we want to be above trend. But if we end right on trend, we’re still looking at a great return.
That result would also happen to line right up with TradeSmith’s Yellow Zone level – a caution signal that tells us to take a closer look at what’s happening with price action. That’s at about 5590 for the S&P 500.
Slipping below that level would be shaky for stocks, but we wouldn’t really suggest a bear market is imminent until we get close to the Red Zone at about 5260.
Also, check out oil…
While stocks waffle, it helps to zoom in on various other important areas of the market for opportunities.
As regular readers know, I’m long-term bullish on oil and gas stocks. Setting aside the fact that oil and gas still predominantly power the world, the sector is extremely cheap and ripe with high dividend yields.
Doing my morning review of the futures market, I noticed that oil is finally perking up again. Oil futures are breaking to a two-month high and above a key area of interest for oil traders the past several years.
The chart tells all – almost every time oil has broken from this area, it’s put on a serious short-term show. Check out the breakouts in late 2021, early 2022, mid-2023, and early 2025 for the proof.
That tells me it’s time to get more bullish on oil and gas stocks. After all, as the price of oil rises, these companies’ profits margins rise substantially.
Now, you could just buy a boring old ETF like the Energy Select Sector SPDR Fund (XLE) and call it a day. And you’ll probably get some boring returns for your trouble.
Or, if you want to really make some money during what looks to be a key time to own oil and gas stocks, you could use TradeSmith’s tools to do even better.
Lately we’ve been focusing a lot on seasonality here at TradeSmith. For good reason – it’s shown to be an unmissable factor for short-term trading and even for structuring a longer-term rotation strategy.
Our software scans thousands of stocks in the market and isolates the best times to trade them down to the day, and both to the upside and downside.
So, with a tailwind at the back of the oil market, let’s see what seasonality patterns are coming up for stocks in the oil and gas sector.
To do this, we can set up a simple screener in TradeSmith Finance. Here I’m looking for U.S. oil and gas stocks with seasonality patterns that:
Will begin in the next 15 days…
Have an average win rate of more than 70%…
Have an average return of more than 3%…
And go back over the last 15 years.
Understand, this is a pretty tall order – the XLE ETF has been positive for just 8 of the last 15 years according to our data:
So it’s no big surprise that just one stock pops up from this screen.
But the stats behind this stock are a pleasant surprise indeed.
EOG Resources (EOG) shows an average return of 4.41% from Jan. 3 (that is, today) to Jan. 18, and it’s hit this return 86.67% of the time – or 13 out of the last 15 years:
There are other, longer-term periods of bullish seasonality for EOG this year – in March and September. There’s also one distinctly bearish period in mid-August.
A discerning trader might want to buy EOG stock or trade some call options dated out to next month to take advantage of this multi-faceted trend.
They might also want to take the unique opportunity to use our seasonality software tool for free by signing up here.
Our CEO, Keith Kaplan, is so impressed by the new seasonality trading strategy our research team developed that he considers it our major breakthrough for 2025 – and possible our biggest ever.
He wants everyone to try the tool ahead of the webinar he’s holding on the subject next Wednesday, Jan. 8.
Keith had our elite research team backtest our seasonality system with all sorts of different criteria.
Ultimately they discovered the simplest strategy was the most effective:
After narrowing it down to a two-step process for selecting these trades, the strategy showed 857% growth over 18 years – more than twice what the S&P 500 delivered over the same period:
You can check out our seasonality charts right here – and find a bunch of other seasonality trades to make this year – ahead of our Breakthrough 2025 webinar on Wednesday. I’ll see you there, as well as in my next TradeSmith Daily.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
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