Tuesday, December 9, 2014

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 less than four weeks of trading remaining in 2014. Markets are closed on Thursday, 12/25/14, for the Christmas holiday.  Markets close early on Christmas Eve, Wednesday, 12/24/14, at 1 PM ESTThe 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; this is the seasonality that bullish traders are touting over the last couple weeks. It is very difficult to bet against the happy month of December.

The largest market gains for the year occur between November and April with December the second month of this six month bullish period.  Money managers typically put money to work starting November and that is obviously the case this year. Everyone continues believing in the power of the Fed's unlimited monetary policy (ZIRP Forever). The fourth quarter (Oct-Dec) of the year typically returns +4.3% for the markets. The SPX started October at about 1940, thus, now at 2060, is a +6.2% jump higher in the last 2 months, already blowing past the expected 4.3% gain for Q4. The SPX could drop -2% from here into year end and still finish at the average +4.3% for Q4.

The trading pre-holiday is typically bullish so keep this in mind for the week of 12/22/14 into Christmas. OpEx Friday is 12/19/14 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 12/16/14 to a high on 12/17/14. On the Monday after OpEx Friday, markets tend to move in the opposite direction as compared to the OpEx Friday direction. The Monday of OpEx week, 12/15/14, is typically up.

Markets tend to be bearish when Congress is in session and the politico's should remain in session sorting out the budget bill into next week; this is typically negative,, however, an agreement may have been reached this evening on the budget which will create a happy tone averting a government shutdown. The FOMC releases the Rate Decision and Forecasts and Fed Chair Yellen speaks on 12/17/14. Traders expec ta continuing dovish tone to end the year which fosters the bullish seasonality and floats stocks higher into 2015. Fed Chair Yellen will conduct a press conference and take Q and A which may create an inflection point on Wednesday, 12/17/14 afternoon.

The ECB Rate Decision and Press Conference was Thursday, 12/4/14 where Presdient Draghi laid an egg trying to push off the full-blown sovereign bond-buying announcement until further into 2015. Draghi and lieutenants were already touting the full-blown QE as a means to help the stock market rally off the mid-October bottom and he was held to task. Stocks sold off but Draghi then quickly said that the full-blown QE will be announced in January which caused the rally late last week. The next ECB meeting is 1/22/15 with the ECB abandoning the once per month first Thursday schedule and now going to a six-week interval between meetings.

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; 12/26/14 through 12/31/14. Markets are closed on New Year's Day, 1/1/15, Thursday.

Retail stocks typically peak on December 1st. You will hear lots of talk about a Santa Claus Rally which typically occurs the last week of the year into the first couple days of the New Year but nowadays any rally after Thanksgiving is typically called the Santa Claus Rally. Markets 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. All is fine for 2015 if the Santa Claus Rally occurs.

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 in early December. The second week of December tends to be a weak week and that is true so far this week as this article is written.

The dollar tends to sell off at the end of the year and tends to strengthen in the New Year. This would be good timing since the dollar has gone parabolic and needs to take a rest. Buying oil just before Christmas and selling the first week of January tends to work as a trade. Again, charts are setting up with this idea in mind to play a bounce in oil to end the year but then oil weakness will likely resume (due to weakness in the weekly charts) in January forward. The last trading day of the year, EOY, 12/31/14, 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 identified the period ending last week as having a high potential for beginning a major market selloff; the jury remains out if a double market top has formed, or not. A major Bradley turn occurs now, 12/7 thru 12/10, and another on 12/26/14 so there may be a wild roller coaster-style finish to the year. 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 12/21/14 and markets are typically weak moving through the new moon. The full moon was on Saturday, 12/6/14, and markets are typically bullish moving through the full moon; this was the case with the market up into early Monday morning that then gave way to the bears. The Monthly Jobs Report was Friday, 12/5/14, resulting in the large job gain of 321K (still paltry compared to what would be expected from other recoveries) but markets are now lower than before the number.

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. The holiday shopping routines have become very distorted due to more folks ordering on line so it will be a mystery as to how the sales all work out in the end. However, since shipping dates are firm, the Green Monday date of 12/15/14 is likely a key shopping day for online shoppers. This only leaves shoppers four days to finalize their orders and have a high degree of certainty they will receive their orders before Christmas. 

Sometimes a seasonal low in copper occurs in December and copper has been beaten down in recent months. TJX typically moves higher from late December into early January but retail stocks are starting to look very shaky. Seasonality factors are never something to directly trade off of but instead use them to determine the underlying current of the markets.

Mixing it all together soft markets would be expected the remainder of the week then some buoyancy next week due to OpEx Monday and the Tuesday low to the Wednesday high, as well as markets floating higher in front of the FOMC meeting on 12/17/14. After the FOMC meeting markets may pivot either way but you have to always give the benefit of the doubt to the Fed and dovish Yellen so the 18th and 19th may be up. The new moon is Sunday, 12/21/14 so markets may be bearish from Friday the 19th through Monday the 22nd. If Yellen lays an egg in the egg nog, then markets may be weak from the 18th through the 22nd. The pre-holiday seasonality and Christmas spirit should then kick in so a Monday low on the 22nd may give way to positivity into Christmas. The last week would be expected to be up. So if the bears want to make a statement before the end of the year they had better come to play tomorrow, on 12/10/14, or they may fold like a cheap suit into the end of the year.

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