Three Stocks Primed for a Santa Claus Rally

The Santa Claus rally refers to the bullish seasonal period that takes place over the last seven days of the trading year and the first five days of the new year. That seasonality is even more powerful in pre-election years and when the stock market is up more than 20% going into the last trading week of the year. Both conditions apply this year.

Another bullish dynamic is the number of fund managers underperforming the market. Given this confluence of factors, one group of stocks to consider getting long for a trade are those that have underperformed for most of the year and are emerging from consolidations and sport a high short interest.

Stocks with these characteristics are attractive because they won't be as extended as other stocks that have been strong all year, thus there's less downside risk. Additionally, higher short interest provides fuel for more upside.

U.S. Steel

19% of U.S. Steel's (NYSE: X) float is short. These shorts have certainly done very well over the past two years as the stock is down more than 75% since topping in early 2018. Notably, this poor performance comes despite President Donald Trump's aggressive efforts to bolster the domestic steel industry. Ultimately, abundant supply and lackadaisical demand in concert with a downturn in the business cycle overwhelmed any benefits from tariffs.

However, there is increasing evidence of a cyclical upturn in the business cycle. Some reasons to believe this is the case are manufacturing data showing low inventories and increasing new orders, the 'Phase 1' agreement between the U.S. and China, and strength in forward-looking measures like stock prices.

The stock is hitting a six-month high and breaking out on a shorter-term timeframe. Traders should look to get long with a stop loss between $11 and $12.5 depending on one's risk tolerance.

Scorpion Tankers

Scorpion Tankers (NYSE: STNG) has been much stronger on the year as it trades near a three-year high. It also has a healthy 11% short interest. Its stock has consolidated on a three-year timeframe and looks ready to break out higher as well as on a shorter monthly timeframe. It's also showing healthy insider buying as management has been loading up on short-term calls, indicating confidence in continued gains in the near-term.

Martin Marietta Materials

Martin Marietta Materials (NYSE: MLM) is breaking out of an almost five-month consolidation. The stock has been one of the leading stocks within housing which has been one of the strongest sectors in the market. Housing led the market for most of 2019 especially as falling interest rates boosted demand. In the last few months, housing underperformed as lagging sectors caught up and interest rates rebounded.

Given Federal Reserve Chairman Jerome Powell's dovish pivot on inflation, downward pressure on rates should resume. Housing should outperform once again, and Martin Marietta's breakout should continue into the next year.