December 22, 2012 at 11:51 AM EST
Will Cliff Problems End Seasonal Rally So Soon?
Saturday, December 22, 11:55 a.m. The market has a consistent history of almost always experiencing a strong rally in the winter months, followed by a ‘Sell In May’ tendency for that favorable period to end with a sell-off. Academic studies as well as our own in-depth research show that simply investing on that pattern, being [...]

Saturday, December 22, 11:55 a.m.

The market has a consistent history of almost always experiencing a strong rally in the winter months, followed by a ‘Sell In May’ tendency for that favorable period to end with a sell-off. Academic studies as well as our own in-depth research show that simply investing on that pattern, being fully invested in the winter months and exiting to cash for the unfavorable season, significantly out-performs the market over the long-term, while taking roughly only 50% of market risk.

The U.S. market seemed to have launched into that age-old pattern in November.

122212g

And it’s not just a U.S. pattern, but a global pattern. Academic studies show the pattern has existed for many decades in 36 of 37 developed and emerging markets. Market’s Seasonal Patterns in Global Markets!

And there has also been a rally underway globally with only a minor pullback in November.

122212h

However, no pattern or strategy is 100% perfect. And there have been a few instances when market corrections took place in the almost always positive favorable season.

The worst we have experienced was in the severe 2007-2009 bear market during the 2008 financial meltdown and crisis.

Even then the seasonal pattern avoided most of 2008 decline, significantly out-performing the market. And although there was another leg down in the fall of 2008, by May, 2009 the market had recovered most of that decline.

122212i

But obviously, although unusual, corrections can take place in the market’s usual favorable season.

As the top chart shows, with this favorable season rally underway, markets have been confident until yesterday that the fiscal cliff talks would be successful in at least kicking that potential problem down the road into next summer.

And as I have been saying for a couple of months now (and as I did in 2011 in that fiasco leading up to raising the debt ceiling), it has been my expectation that an agreement would be reached but only in panicked meetings at the very last minute.

But as that very last minute approaches this time, only 7 days to go, it would be foolhardy not to realize that anything can happen when idealism may trump realism without regard for the consequences.

Our non-seasonal Market-Timing technical indicators remain on buy signals for a number of U.S. sectors and global markets, but the situation in Washington does have us watching them closely for any early signs of changes. 

Other Voices:

Virtually no optimism:

Randall W. Forsyth, Barron’s: “Politicians know the economy faces an end-of-the-world moment. Their solution. Let’s go home for the holidays.”

James Politi, The Financial Times: “Negotiations could take place quietly over the short-break, away from the bluster of Capitol Hill, to be followed late next week by votes that would garner both Republican and Democratic support. But pessimists warn that such a scenario is wishful thinking.”

The Economist: “Any deal Mr. Obama and Mr. Boehner strike in coming days will almost certainly leave the details of tax and entitlement reform to 2013. By then, says Tom Gallagher, a policy analyst for the Scowcroft Group, the bipartisanship that made the initial deal possible may have petered out. The fiscal cliff will be gone; the fiscal uncertainty will continue.”

Short-Term Market Patterns.

As we told subscribers last week, this week was the week of the December quarter’s quadruple-witching options and futures expirations. The expirations week tends to be positive, and this week was positive, in spite of yesterday’s 1% market decline.

The next pattern is that the week between Christmas and New Year’s normally has a strong tendency to be positive. But the term normal is out of the picture for the moment as Washington keeps markets on edge with the cliff talks.

A Big Thank-You!

A big thank-you to subscribers who have been buying subscriptions to Street Smart Report as Christmas gifts to relatives and friends. We will continue to work hard to make sure those gifts are appreciated by the recipients.

To read my weekend newspaper column click here: Politicians Will Not Sandbag a Very Promising Recovery!

Subscribers to Street Smart Report: There are important charts and recommendations in the ‘premium content’ area of this morning’s blog.

Yesterday in the U.S. Market.

A nervous and negative day in response to the confusion and delays in the fiscal cliff efforts. Volume was very heavy as usual on a quadruple-witching expirations day, with 1.9 billion shares traded on the NYSE.

The Dow closed down 120 points, or 0.9%. The S&P 500 also closed down 0.9%. The NYSE Composite closed down 0.9%. The Nasdaq closed down 1.0%. The Nasdaq 100 closed down 1.1%. The Russell 2000 closed down 0.5%. The DJ Transportation Avg. closed down 0.3%. The DJ Utilities Avg closed down 0.6%.

Gold closed up $9 an ounce at $1,655.

Oil closed down $1.29 a barrel at $88.84 a barrel.

The U.S. dollar etf UUP closed up 0.5%.

The U.S. Treasury bond etf TLT closed up 1.1%.

Yesterday in European Markets.

European markets were mostly down some in reaction to the turn of events regarding the fiscal cliff talks in the U.S. The London FTSE closed down 0.3%. The German DAX closed down 0.5%. France’s CAC closed down 0.1%. Italy closed down 0.4%. Spain closed up 0.3%. Greece closed up 1.8%.

Global markets for the week.

The disappointing turn of events in the fiscal cliff talks in the U.S. on Friday ended the week on a sour note, although not enough to prevent a positive close for the week. And there was a sizable further decline in gold.


THIS WEEK (December 21)
DJIA13190+ 0.4%
S&P 5001430+ 1.2%
NYSE8443+ 1.3%
NASDAQ3021+ 1.7%
NASD 1002664+ 1.4%
Russ 2000848+ 2.9%
DJTransprts5340+ 3.0%
DJ Utilities458+ 1.5%
XOI Oils1,252+ 1.2%
Gold bull.1,655- 2.4%
GoldStcks160- 2.7%
Canada12385+ 0.7%
London5939+ 0.3%
Germany7636+ 0.5%
France3661+ 0.5%
Hong Kong22506- 0.4%
Japan9940+ 2.1%
Australia4635+ 0.9%
S. Korea1980- 0.8%
India19242- 0.4%
Indonesia4250- 1.4%
Brazil61007+ 2.4%
Mexico43621+ 1.3%
China2254+ 0.1%
LAST WEEK (December 14)
DJIA13135- 0.1%
S&P 5001413- 0.3%
NYSE8333+ 0.2%
NASDAQ2971- 0.2%
NASD 1002628- 0.4%
Russ 2000823+ 0.2%
DJTransprts5186+ 1.1%
DJ Utilities451- 0.6%
XOI Oils1,237+ 1.0%
Gold bull.1,695- 0.5%
GoldStcks164+ 1.6%
Canada12296+ 1.1%
London5921+ 0.1%
Germany7596+ 1.0%
France3643+ 1.0%
Hong Kong22605+ 1.9%
Japan9737+ 2.2%
Australia4595+ 0.9%
S. Korea1957+ 1.9%
India19317- 0.5%
Indonesia4308+ 0.4%
Brazil59604+ 1.9%
Mexico43050+ 0.6%
China2252+ 4.4%
PREVIOUS WEEK (December 7)
DJIA13155+ 1.0%
S&P 5001418+ 0.1%
NYSE8314+ 0.5%
NASDAQ2978- 1.1%
NASD 1002640- 1.4%
Russ 2000822+ 0.1%
DJTransprts5128+ 0.2%
DJ Utilities454- 0.1%
XOI Oils1,225+ 0.7%
Gold bull.1,704- 0.6%
GoldStcks162- 4.8%
Canada12159- 0.7%
London5914+ 0.8%
Germany7517+ 1.5%
France3605+ 1.3%
Hong Kong22191+ 0.7%
Japan9527+ 0.9%
Australia4555+ 0.8%
S. Korea1957+ 1.3%
India19424+ 0.4%
Indonesia4290+ 0.3%
Brazil58487+ 1.8%
Mexico42797+ 2.3%
China2158+ 4.1%

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In the Premium Content area this morning. Up-to-the-minute stock market, gold, and bond signals and charts, short-term and intermediate-term.


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Next week’s Economic Reports:

In addition to being a short holiday week, there will be very few potential market-moving economic reports, but they include New Home Sales, Consumer Confidence, and the Chicago PMI Index. To see the full list click here, and look at the left side of the page it takes you to.

To read my weekend newspaper column click here: Politicians Will Not Sandbag a Very Promising Recovery!

NOTE: There will be no blog post next Tuesday, Christmas Day! There will be an in-depth Market Signals and Recommendations Report on Wednesday for subscribers, and the next blog post will be on Thursday.

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