Keystone's December Seasonality Factors for Trading the Markets; Merry Fiscal Cliffmas

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 2012; 21 trading days with markets closed on Tuesday, 12/25/12, for the Christmas holiday.  Markets close early on Christmas Eve, Monday, 12/24/12, 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. December is the best month for RUT for the third and fourth years of the presidential cycle. We are in the fourth year so seasonality points to a strong showing for small caps this month.

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 (Oct-Dec) of the year typically returns 4.3% for the markets. The SPX is flat to down during October and November this year.  Thus, markets need a strong push higher to match the seasonality averages.

The trading pre-holiday is typically bullish so keep this in mind for 12/20/12 thru 12/24/12.  OpEx Friday is 12/21/12 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 12/18/12 to a high on 12/19/12. On the Monday after OpEx Friday, 12/24/12, 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.  The FOMC meets on 12/11/12 and 12/12/12. The Fed must provide a decision on Operation Twist which expires at the end of the month. Current consensus is that the Fed will replace it with another quantitative easing program and the markets will love the crack cocaine.  The ECB Rate Decision and Press Conference is Thursday, 12/6/12, and will move markets. A rate cut would weaken the euro and equity markets should trail lower.  If no rate cut occurs, which is the current projection, the euro will move flat to up along with equities markets. Technology and biotech are strong sectors during Q4.  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. Perhaps this year it will be a Fiscal Cliffmas 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 the Santa 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 may be exacerbated due to the rising taxes next year. 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, 12/31/12, 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 EOY period as a potential large market sell off area.  A major turn occurs at the end of the month as per the Bradley model on 12/22/12. Thus, a window is open from 12/14/12 thru 12/28/12 for a major market trend change to occur.  The Bradley turn can be up or down.

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.