Keystone's December Seasonality

The turkey leftovers are long gone as the aroma of freshly baked Christmas cookies fills the air. The December winds are blowing now with four weeks of trading remaining in 2011; 19 trading days since markets are closed on Monday, 12/26/11, due to the holiday.  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. December is the best month for RUT for the third and fourth year of the presidential cycle. We are in the third year so seasonality points to a strong showing for small caps this month. Note how the RUT was up 10.3% this week. The third year of the presidential cycle is also the best year for the markets for the cycle but the SPX is flat this year thus far. So this seasonality is agreeable to market buoyancy to finish the year. But to the counterpoint once again, the unprecedented stimulus since 2008 damages the presidential cycle expectations.  The idea is that the sitting President spends lots of dough to make everyone happy in front of the election but with all the spending over the last months and years this is not the typical cycle behavior.

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. The fourth quarter of the year typically returns 4.3% for the markets. The SPX is up 10% thus far in Q4 (October to present) already over twice what would be expected. A broad market sell off of 5 or 6% would simply place the indexes in line with seasonality.

Pre-holiday seasonality says the two days in front of a three day weekend tend to be bullish so that would apply to 12/22/11 and 12/23/11. OpEx Friday is 12/16/11 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 12/13/11 adn 12/14/11. On the Monday after OpEx Friday, 12/19/11, markets tend to move in the opposite direction as compared to the OpEx Friday direction.

Today, 12/2/11, was Jobs Report Friday.  Typically, the late morning market trend dictates the month-end market direction and Friday's action showed a steady deterioration all day long after a market pop at the open. Thus, this hints at late month weakness. Markets tend to be bearish when Congress is in session and with the ongoing budget discussions and other legislation issues front and center in Washington D.C., this is a market negative.  The FOMC meets on 12/13/11.

New money flows into the funds the first couple days of the month but when the first couple days are down, the buying is delayed a few days and market buoyancy will follow along a few days later. The first two days of December are flatish perhaps hinting at some market buoyancy for the first full week of December next week. Technology and biotech are strong sectors during Q4.  Window dressing will play a role during the final few days of this month.

Retail stocks typically peak on December 1st. Holiday sales are somewhat predictable from back-to-school sales and those sales were acceptable but by no means robust, thus, an average shopping season is projected. 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 period. 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 Santa is on a milk carton.

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. 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, 12/30/11, 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 postions 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 the mid-December thru mid-January period as a potential large market sell off area.  A major turn area occurs at the end of the month as per the Bradley model on 12/28/11. Thus, a window is open from 12/21/11 thru 1/4/12 for a major market trend change--opposite the direction of the existing trend direction occurring during the second and third weeks of the month.

What's it all mean? As you can see, some of the seasonality factors above are in conflict with each other especially considering the odd market behavior this year.  Seasonality factors are never something to directly trade off of but instead help a trader quantify the background noise.  Seasonality factors help traders keep the wind at their backs.  The back drop of Europe providing concrete solutions next week ahead of the 12/9/11 E.U. Summit should favor market buoyancy next week. The markets will react violently, one way or the other, depending on the results of the E.U. Summit, and this will greatly affect trading for the rest of the month.

In summary, look for some market buoyancy from 12/13/11 to 12/14/11. An oil trade may be an attractive long from 12/21/11 or 12/23/11 into early January. Look for overall broad market bullishness on 12/22/11 and 12/23/11 ahead of the holiday weekend. The last week is typically bullish but caution is warranted since Keystone's Eclipse Indicator and the Bradley turn window will be open.  Caution is the key this month especially into the 12/9/11 E.U. Summit.