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Let me tell you a quick story, I promise it leads to a point
about the market. In January of 2010 I
went on a cruise with my parents the week of MLK Day. The thought process was simple, I would only
miss four trading days instead of five, what could I possibly miss out on? The market had been churning sideways to
slightly up for virtually a month and was showing no major signs of any
significant moves. So it was the perfect
time for some Caribbean sun and a few drinks
with umbrellas stuck in pineapple. I vividly
remember what happened next. Wednesday I
was walking back to the ship, looked into a bar that had CNN on, and the ticker
showed the S&P -20. Next day, the
same thing. The day after that, same
thing. I was FURIOUS. The move I had been waiting over a month for
happened while I was stuck on a ship away from any way to trade. So what's my point? As always, let me present charts with
The January Effect, like its equally annoying cousin, the
Santa Claus Effect, is another delightful phrase to remind us all to continue
buying every equity that isn't nailed down.
So let's look at this current January to see how things are
progressing. First, buyers are supposed
to take advantage of lower December prices.
Check. Second, small cap stocks
are supposed to outperform in this environment.
Check. Third, the effect is
supposed to be strongest in the third year of a President's term (2011). Check.
I'd like to examine the last two Januaries to try and give some guidance
as to how this winter season will play out.
As usual, I'll be presenting charts with numbers, and as always, the
numbers are just markers for my points, not waves.
The third year of the President's term gave us a January
Effect that was already well underway.
1. The November high just
slightly exceeded the high for the year.
2. Consolidation to give bears
hope for an end of the year selloff.
3. Break to new highs. 4. An uninterrupted,
three month grind straight higher that absolutely blew the doors off the prior
Another year, another SEC college football
championship. Here is the recap. Alabama,
winners of two of the last three championships, lined up against an overmatched
team from Notre Dame. Alabama's running backs were better, their
offensive line was better, their quarterback was better, their defense was
better, and most importantly their head coach had already won THREE
CHAMPIONSHIPS. Yet there was a case for
all the "what ifs" that could help Notre Dame win.
The Santa Claus Rally, yet another delightful story told to
the public by retail brokers, CNBC, and the rest of the warm and fuzzy spin
doctors of Wall Street. But what happens
when the market wakes up and realizes that Santa, like the Easter Bunny and the
Tooth Fairy just isn’t real, but instead is something made up to make the kids
feel cozy and force the adults spend even more money?
No this isn’t a bitter rant but instead a very real point that needs to
be made about the direction of the market over the next few months.
First, here is the bear case for why the market can and will
go down. First, tomorrow’s FOMC announcement. I’m not exactly sure what Helicopter Ben can
say to further juice this rally.
Anything short of the Fed announcing a bajillion dollars for every good
little boy and girl will either be a non-event or a disappointment. Next, the Grinch masquerading around as the
The rally over the last
month has been in anticipation in the Fiscal Cliff being resolved. So its resolution has already been baked into
the market. Or, our glorious leaders
will do what they always do and fail in epic fashion to solve the problem. Either letting the Fiscal Cliff pass with no
resolution or Obama ramming higher taxes through will be incredibly
bearish. So again, the bears are in a “heads
I win, tails you lose” situation. And
then lastly, there is my post, Bear Market Holiday Sale posted on November 19th. That is what I’d like to discuss further.
On Thursday I wrote a post titled "That Time of Year Again." Basically, I
was calling for a major snap back rally to take the S&P back to the north
side of 1400. While the market ripped
the bears to shreds today, another more interesting November needs to be
examined. And that my friends, is a
November that occurred in the beginning of a bear market; November 2007.
It seems everyone and their
brother was talking about a possible snapback rally on Friday. 1400 was a virtual given according to
conventional wisdom. Today’s action
absolutely confirmed that we are in the midst of the snap back rally. However, the difference between November 2011
and November 2007 is that we are now in a bear market. As before, I’d like to present a few charts
with numbers (they are markers for my comments, not waves) to make a very
Ah, the holidays. A
season celebrating food comas, Christmas decorations before Halloween, cards
sent to people we haven’t spoken to in a year, and pure market insanity. My favorite time of the year is back again.
It is no secret that I love looking at historical patterns
and this year Stock Market Santa appears to be flying down from the North Pole
a month early. November 2011 seems to be
repeating itself all over again. Below
is a chart with some numbers and lines on it, read the text below and I promise
it will make more sense.
Life is insane. Not
in the deranged walking around mumbling to itself way crazy, but just
insane. It’s wild and
unpredictable. Two weeks ago, I was
riding high on the market crashing to the ground, everything burning the way it
should. AAPL was getting destroyed, earnings
were disappointing in a stunningly regular fashion, pressing shorts was
actually working for the first time in 2012.
And then, as usual, life became insane.
Life is insane, through the magic of bullish fate, October’s
FOMC meeting “checked back the runner” and put a pause in the market’s
selloff. The beautiful selloff that
bashed every gap up or 3:00 rally quickly ran out of steam due to fear that the
Bearded One would drop a bomb. Then the
market went sideways after. Fast forward
to Friday of last week. The market
closes near the lows with the bears champing at the bit to let it rip on
Monday. And then Sandy.