Monday, December 2, 2013

Keystone's December Seasonality Factors for Trading the Markets

The turkey leftovers are long gone as the aroma of freshly baked Christmas cookies fills the air. The December winds are blowing now with only four weeks of trading remaining in 2013; 21 trading days with markets closed on Wednesday, 12/25/13, for the Christmas holiday.  Markets close early on Christmas Eve, Tuesday, 12/24/13, at 1 PM EST. The markets are typically up 1.4% for December. This is the best month for the SPX (S&P 500), INDU (Dow Industrials) and RUT (Russell 2000 Small Caps). Markets have been up in December 80% of the time since the 1940's.

The largest market gains for the year occur between November and April with December the second month of this six month period.  Money managers typically put money to work starting November and that is obviously the case this year. Everyone believes in the power of the Fed's unlimited QE Infinity. The fourth quarter (Oct-Dec) of the year typically returns 4.3% for the markets. The SPX started October at about 1680, thus, now at 1806, is a +7.5% jump higher in the last 2 months, already blowing past the expected 4.3% gain for Q4. If the SPX finishes at the average +4.3% for Q4, the SPX would have to drop about 50 or 60 handles in December to 1750-ish.

The trading pre-holiday is typically bullish so keep this in mind for 12/20/13 thru 12/24/13.  OpEx Friday is 12/20/13 and is typically an up day. The markets are typically bullish from the Tuesday into the Wednesday of OpEx week so watch for some market buoyancy from a low on 12/17/13 to a high on 12/18/13. On the Monday after OpEx Friday, markets tend to move in the opposite direction as compared to the OpEx Friday direction.

Markets tend to be bearish when Congress is in session and with the ongoing fiscal cliff drama playing out in Washington D.C., this is a market negative. Congress has committed to providing a detailed road map to solve the budget crisis by 12/13/13. The FOMC meets on 12/17/13 and 12/18/13. Chairman Bernanke will conduct a press conference and take Q and A on 12/18/13 so this is a major inflection day this month. The ECB Rate Decision and Press Conference is Thursday, 12/5/13, and will move markets. A further rate cut would weaken the euro and equity markets should trail lower. Technology and biotech are strong sectors during Q4 but with the stellar year already on the books, further strength is questionable.  Window dressing will play a role during the final few days of this month, between Christmas and the New Year.

Retail stocks typically peak on December 1st. You will hear lots of talk about a Santa Claus Rally. This typically occurs in and around Christmas, especially between Christmas and New Years and a week or so into the New Year, so keep an eye out for market buoyancy in this periodMarkets are up about 75% of the time between Christmas and New Years with about a 1% positive move. An old adage on Wall Street is that "if the Santa Claus Rally fails to call, there's a breakdown at Broad and Wall." In other words, the markets have an underlying problem if the Santa Claus rally does not occur.

The largest amount of tax loss selling occurs during the first week of December, since traders can buy the issue back in early January and avoid the wash sale rules, so some market weakness tends to appear. This year the selling of gold and gold miners is likely due to tax loss selling as traders seek to offset the equity market gains with losses. This behavior hints that gold and the miners should bottom and recover into 2014. The dollar tends to sell off at the end of the year and tends to strengthen in the New Year. Buying oil just before Christmas and selling the first week of January tends to work as a trade.  The last trading day of the year, EOY, 12/31/13, is up about 80% of the time. The last two days of the year tend to be flat overall. Trading volume tends to drop off drastically for the last couple weeks of the month. This is because the larger money managers have difficulty adjusting positions on lower volume so typically the higher volume action occurs during the first half of the month. Traders are more focused on eggnog and other holiday cheer in the back half of the month.

Keystone's Eclipse Indicator identifies this current period through 12/11/13 as having a higher potential for a major market selloff.  A major Bradley turn occurs on 1/1/14 to begin the year and another Bradley turn date follows quickly on 1/9/14 so December and into early January may be volatile for equities. Bradley turns can be up or down; they do not predict direction only that a market inflection point will occur. The new moon occurs on 12/2/13, today, and markets are typically weak moving through the new moon. The full moon is 12/17/13 and markets are typically bullish moving through the full moon. Note that 12/17/13 is also OpEx Tuesday, mentioned above, so the markets may be a buy on 12/16/13 and 12/17/13 for a couple day pop into the FOMC meeting 12/18/13. The Monthly Jobs Report is Friday, 12/6/13, and very important considering the emphasis the Fed is placing on data.

The second Monday in December is called Green Monday and one of the busiest shipping days of the year as holiday shoppers rush to order for fear of not receiving the items in time for Christmas. Sometimes a seasonal low in copper occurs in December. TJX typically moves higher from late December into early January but this is another stock that has seen obscene gains this year already. Seasonality factors are never something to directly trade off of but instead use them to determine the underlying current of the markets.  Seasonality factors help traders keep the wind at their backs.

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