The Most Wonderful Buy of the Year By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - The Santa Claus rally is about to heat up…
- The best stock from the best seasonal benchmark…
- Small caps gain strength but need to follow through…
- Long-duration bonds break their downtrend…
- Bitcoin dominance falters…
- Why you shouldn’t sit out Friday’s short session…
It seems like the holidays come earlier and earlier each year… The Salvatore household is celebrating earlier too, with Christmas tree shopping plans on deck this weekend. (My wife didn’t win the argument that we should have a fully loaded Christmas tree up before the Thanksgiving turkey came out of the oven.) Stocks, too, are celebrating early. The S&P 500 is up 4.5% since the start of November. The Nasdaq 100, a recent laggard, is up 3.6%. And the star of the show, the small-cap Russell 2000, is up more than 11%. What was previously a rally celebrating the election result is now morphing into the traditional “Santa Claus” rally. And our natural inclination at TradeSmith is to optimize this Santa Claus rally as much as we can. I had a simple question this morning: Which of the major benchmarks performs best through the holiday period of the day before Thanksgiving (today) and New Year’s Eve? If you’re done writing your Black Friday shopping list, don’t put your pen down. Because we have some great data to chew on. Take a look at the four major benchmark returns from today, the 237th trading day of the year, through the final trading day of the year. Note how we’re using ETFs here to get a better sense of the way stocks trade in the modern era (since the advent of ETFs and increased participation of retail investors in the ‘90s): 
The data tells us that the highest odds bet is, in fact, not small-cap stocks, which have just charted a new all-time high (more on that later). The biggest seasonal winners during the Santa Claus rally are tech stocks, with positive returns more than two-thirds of the time over 33 years of data… an average return counting wins and losses of 1.9%… an average winning trade of 5.8%, the highest of all the benchmarks… and also the highest average loss at 5.9%. If you think stocks will carry through with strong performance at the end of 2024, as I do, then tech is the trade to make despite the lagging performance of late. Regular readers know what happens next. We drill deeper… Betting on tech via QQQ is one thing. Combing through the data to find the best end-of-year stock in the tech-heavy group is another. Here are the top 10, sorted by win rate, and after filtering out any stock where a single winning trade accounted for more than a fifth of the cumulative profits: 
The top 7 stocks in this list all have win rates above 66%. More than two-thirds of the time, they end the year positive. And among that group are some real head turners. Biotech Illumina (ILMN) has had a rocky 2024, at one point down 25% on the year, and has recently staged a big recovery. Counting wins and losses, the stock has moved 10% higher on average from now through the end of year, with winning trades accounting for an 18.19% return. The highest win rate bet at 78.3% of the last 23 years is semiconductor firm Marvell Technology (MRVL). That also has a solid winning average return of 10.48% during those positive years. Data like this is invaluable for swing traders. It shows you the best places to look during already strong periods. Keep this list at the ready, and we’ll check in on these names near the start of 2025 to see how they did. Small caps are the last big benchmark to break out… During Monday’s session, the iShares Russell 2000 ETF (IWM) very briefly touched new-high territory before retreating along with the other benchmarks. That’s the first new high for the small-cap group in close to three years. As we discussed Monday, new highs are one of the best things a bull can ask for. New highs mean price discovery. They’re one of the surest signs of strong momentum. And not only are small caps breaking out, they’re breaking out well against the former heavyweight of the market – tech. 
IWM has been underperforming the tech-heavy Nasdaq 100, as represented above by the Invesco QQQ Trust (QQQ), for a long time. Matter of fact, the IWM vs. QQQ chart has been in a steep downtrend since 2006, a few years before the tech trade would really take over. The chart above looks constructive, at least for the short term. The ratio broke out back in July, traded around the former resistance line to build support, and started rising again in late October. If IWM can continue to rally faster than QQQ, that could set the stage for a more sustained period of small-cap outperformance. Do keep in mind, though, that small caps have the weakest seasonal performance from now through year-end. The trend in Treasury yields has changed… And it could be a big bull signal. Take a look: 
We’ve been closely watching Treasury yields here in TradeSmith Daily. Reason being is that their disconnect from stock prices has been unusual. Typically, as yields rise, stock prices take a beating. We don’t have to think that far back for the proof – look at this chart of the iShares 20+ Year Treasury Bond ETF (TLT) and the SPDR S&P 500 ETF (SPY) going back to the summer-fall rout of 2023: 
As long-term Treasury yields surged in 2023, Treasury and stock prices dragged lower. This year, we saw surging Treasury yields but a shrug from the stock market – completely out of whack with history. What’s likely to happen as they get back “in whack”? In all likelihood, higher stock prices along with lower Treasury yields. That drop in Treasury yields will weigh on sidelined cash assets and ease the burden on lending – two big points for equities. To us, this reads as just as big a buy signal as when long-term yields bottomed late last year. Bitcoin dominance is finally starting to drop… And the crypto story is about to get a whole lot stranger. Take a look at this chart: 
If long-term Treasurys are the most important chart in the stock market, this is the most important chart in crypto. It shows bitcoin’s share of the total cryptocurrency market cap. Bitcoin dominance (BTC.D) was recently as high as 61% and has since retreated to 58.6%, breaking the clear uptrend it’s been in since 2022. We still need to see a little more downside before we can call the trend turned, however. BTC.D did drop below the uptrend line back in July of this year, as altcoins got a moment in the sun. At the time, it fell as far as 1.35% below that trend line. As it stands right now, we’re only 0.81% below the line. I’ll continue to emphasize that this is a key chart to watch. If we see continued downside in bitcoin dominance, it means that altcoins are catching up. And altcoins, with a market cap a fraction of the size of bitcoin, can post major returns during bull cycles. Understand, I’m not saying you should ditch bitcoin and go all-in on alts. You shouldn’t even do that if the chart above confirms a trend change. Bitcoin has and likely will continue to stand the test of time. But I am saying that, if you’re in this space, it’s getting to be time to start speculating in the altcoin market. My best advice there would be to stick with the higher-market-cap altcoins that are trading near their previous all-time highs. Here’s why you should take some time to trade on Black Friday… Veteran CBOE market maker Jonathan Rose sees some intriguing opportunities on one of the very charts we just discussed. And, based on the data from his V.I.T.A.L. tool he just shared in his free webinar yesterday, he’s looking to trade that opportunity on Friday with zero-day options. Technically, any option can be a zero-day option if it has less than one day until expiration. But on major indexes like the S&P 500 and the Nasdaq 100, there are now daily options listed that you can trade. In their first two years on the scene, these zero-day options have inspired a lot of pearl-clutching… as seems to be the case with any new trend that catches on so abruptly. One study showed that the majority of retail options volume now takes place in contracts set to expire in five days or less. And ever-reliable economists have espoused concerns that “the growing size of the 0DTE segment may lead to sharp market swings as large as $30 billion, particularly in the current low-liquidity environment,” as JPMorgan Chase put it in a 2023 report. Despite the naysayers, though, it’s clear that people are highly favoring the short-term direction of markets to find their fortunes. At the end of the day, options market makers are just giving us another tool for our trading toolkit: more flexibility in timing our trades. Take this, for example. In Jonathan’s webinar, One-Day Winners, he compares the different options expirations to the box office at a movie theater: 
No matter which day you buy your ticket for… you’re still seeing the same movie. It’s just that, when it comes to trading, options can get volatile on the day before expiration, so that’s one additional layer of risk you have to plan for. The key is that Jonathan’s trades work better that way… because he sets them up as non-directional positions. That’s certainly true of the Black Friday Anomaly trade Jonathan walks you through in the webinar to show you how this can work for you. Watch the replay now for the basics of zero-day options trading, including Jonathan’s five-step method, and to check out the live trade idea for yourself. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
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