Taking a Leveraged Bet on a Santa Claus Rally

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

U.S. stock markets ended the week pretty much where they started over the holiday-shortened week. The Dow Jones fell 0.14%; the S&P 500 was up 0.04%; and the NASDAQ eked out a 0.44% gain. The MCSI Emerging Markets Index suffered an uncharacteristic pullback, dropping 3.36%.

Big gainers in your Bull Market Alert portfolio included the ProShares Ultra Nasdaq Biotechnology ETF (BIB), which climbed 4.42%; and Manhattan Associates, Inc. (MANH), which jumped 3.12%. You were stopped out of Paycom Software, Inc. (PAYC) with a 10% gain in the stock. Both NetEase, Inc. (NTES) and Luxoft Holding Inc. (LXFT) hit new 52-week highs.

All of your current positions are buys.

This week’s Bull Market Alert recommendation is the Direxion Daily Small Cap Bull 3X Shares (TNA), which delivers triple the daily performance of the Russell 2000 — a widely followed index of small-cap stocks.

Here’s why I expect this position to generate a solid double-digit percentage gain between now and Christmas.

First, I am a big believer in the seasonality of the markets. And as I have noted before, November marks the start of the best six-month period in which to be long in equities. And the next month for small caps is particularly strong.

As FTSE Russell points out, U.S. small-cap stocks have had a positive return between Nov. 20 and the year’s end in 18 of the last 20 years — a 90% success rate.

U.S. large-cap stocks also show a positive return in 18 of the last 20 years. But the “Santa Claus Effect” has been more pronounced in small caps. The Russell 2000 has averaged a 5.6% increase between Nov. 20 and the year’s end over the last 20 years, compared to a 3.4% average increase in the Russell 1000 over the same time period. That’s a very strong gain over the next month.

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Second, I also believe in “reversion to the mean” — the idea that things tend to return to their long-term trend. Small caps have had a rough 2015, with the Russell 2000 generating a modest year-to-date loss of 0.19% while the S&P 500 is up 1.52%. A large weighting in healthcare stocks has hit small caps hard. And the Russell 2000’s financial services holdings are seen as vulnerable to higher interest rates. Still, over time, this gap will return to favor small caps, and this is the time of the year I expect them to catch up.

So buy the Direxion Daily Small Cap Bull 3X Shares (TNA) at market today and place your stop at $59.50.

With small caps overbought over the very short term, I am holding off on recommending options on this until next week.

Portfolio Update

ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA) rose 0.28% over the four-day holiday trading week. ULTA will report third-quarter earnings on Dec. 3 (Thursday) after markets close. Analysts’ consensus estimates anticipate $1.06 earnings per share (EPS). ULTA last reported $1.15 EPS for its second-quarter earnings report. ULTA is a BUY.

Alaska Air (ALK) lost 2.57% last week despite turning in a stellar performance just the week before — and ALK was not alone. Airline and travel stocks went down nearly across the board last week, averaging more than a 2% loss on news that Turkey shot down a Russian military plane flying along its border with Syria. ALK remains a BUY.

Ultra Nasdaq Biotechnology ProShares (BIB) climbed 4.42%. Biotech continued to gain last week as it moved even higher after recently crossing above its 50-day moving average (MA). BIB remains below its 200-day MA and has plenty of room to run back up to its 52-week high during the upcoming two strongest quarters of the year. BIB is a BUY.

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NetEase, Inc. (NTES) took a breather last week, closing the week flat, but still managed to make a new 52-week high. NTES moved briskly higher the week prior after announcing strong earnings and spurring an investor buying spree. However, many traders took a holiday break last week, as did NTES. NTES is a BUY.

Luxoft Holding Inc. (LXFT) added 0.95% and briefly hit a new 52-week high. The 2015 “Global R&D Service Providers Rating” (GSPR) published last month listed Luxoft within the leading “Established” category for the second year in a row. This distinction is attained through excellence in metrics such as “specialization, research and development practice maturity (depth and breadth of services), innovation and intellectual property, and eco-system linkages.” LXFT is a BUY.

Manhattan Associates, Inc. (MANH) jumped 3.12% for its first week in your portfolio. All four analysts providing coverage on MANH unanimously list the stock as a “Buy.” MANH is above its 50-day MA, rating it as a BUY in the Bull Market Alert portfolio as well.

NEW FEATURE — Receive your alerts via text! You now can receive a text message on your cell phone to inform you whenever a trading alert is sent. To add this free new benefit to your service, please send an email to CustomerService@NicholasVardy.com with the following information and mention in the email that you want your cell phone added to your account:

  • Your Name
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  • Your Cell Phone number

Please note that we can only deliver text messages to cell phones with U.S. or Canadian numbers. Standard text messaging rates from your provider apply.

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Nicholas Vardy

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