Banking On A Strong December? Better Check Your History FirstDecember 6, 2011 @ 8:19 AM EST
While we are waiting for EU leaders to finalize their latest grand plan and for the ECB's big move, we thought we'd review what the month of December has done for investors.
Most investors are aware of the positive bias to December and the "Santa Claus" rally. What most do not know is that December should be broken into two distinct time periods. These two periods have vastly different historical seasonality aspects.
The "Early December" time period spans the first trading day of December and ends (no surprise here) the day before the "Late December" period begins. The "Late December" time frame is defined as encompassing the last 7 trading days of December. As the calendar changes each year, so might the starting date for the "Late December" period change. For this year the "Late December" period begins on December 21st.
Now let's look at three tidbits regarding what I call the "real" December seasonality.
First, for the past 83 years (1928-2010, inclusive) the average "Early December" gain is 0.26% and the market has gained ground only 60.2% of the time. As for the "Late December" period the average gain is 1.22% with an 80.7% likelihood of the market advancing.
Second, the numbers are dramatically different for both periods depending upon the secular market environment. For Decembers of years that are part of a Secular Bull Market the average "Early December" result is a 1.49% gain. However, for Secular Bear Market Decembers the average result is a -1.25% loss.
Quite a difference.
While it is only opinion and not "fact", I believe we remain in a Secular Bear Market that has been running since 2000. That tells me that for this year the "Early December" period will, more likely than not, turn out to be a disappointment for the Bulls among us.
The good news: historically the "Late December" period during Secular Bear Markets is very positive with an average 7-day gain of 1.43%.
Again, I believe we remain in a Secular Bear Market, but that is simply my opinion based upon the data I see. Others may well disagree.
Now the third bit of research to share regarding the month of December and Year-end rallies.
We concluded November with a 3-day gain of roughly 7.25% (11/28 through 11/30). Looking back over the past 83 years there has only been 9 years in which the DJIA rose at least 5% during the final days of November. I looked at all results for 8 time periods which all ended on the final November trading day. The time spans examined were: 3-days, 4-days, 5-days, 6-days, 7-days, 8-days, 9-days, and 10-days.
Of the 9 previous occasions when a large rally took place during the final trading days of November, only 4 times did the following "Early December" period produce a market advance. Further, two of those were gains of less than 0.65%. (Note: these were followed by "Late December" periods which had huge 7-day losses; -3.03% and -5.64%)
In conclusion, when I combined Secular Bear Market "Early December" period results with those which followed large end-of-November gains the odds seemed to strongly favor a market decline.
Add in standard short-term metrics and it looks to me like ringing the register recently may have been a smart move.
Have a good one...
Options Manager: Daily Decision-PRO
P.S. Here's an unabashed pitch for Daily Decision-PRO Service - It's beaten the market handily for five months running now.
Remember, you are in control your email alerts! You can receive alerts for more than 25 free research report alerts including: The “10.0” Report, The Insiders Report, ETF Leaders Report, and The Focus List.