Trader’s Narrative

This is a guest post by Wayne Whaley

The markets tend to be in a good mood the week before holidays, since 1950, the S&P 500 is 40-19, up 67.85 of the time during the four day week (including Friday) of Thanksgiving for an average gain of 0.78%

On average, all of those gains come on the two days surrounding Thanksgiving, which are 51-8, up 86.44% for an average gain of 0.80%.

The week after Thanksgiving can be a bit of downer and the markets have a bearish tilt as well, 28-31, up only 47.46% of the time for an average loss of 0.24%

The Turkey trimmings really take their toll on the Monday after Thanksgiving, as it takes the big hit, 24-35, up only 40.68% of the time for an average one day loss of 0.38%.

The last five Monday’s after Thanksgiving have been down, including last year’s (2008) loss of 8.93%.

S&P 500 % Chg for Thanksgiving the Last 20 years:

I couldn’t distinguish a discernible difference in the data in up or down years.

It has been my observation that since these type trading strategies became well documented over the last couple of decades, they tend to be anticipated a day or two. Be careful.

This is a guest post by Wayne Whaley, CTA:

Before presenting my latest seasonality study - which may be the most statistically significant - here is a short summary of the previous three studies that I have shared with you. Enjoy.

End of Year Positive Bias
Since 1950, the average annual return on the S&P 500 index has been 8.05%. Over half of that (4.25%) annual return has on average occurred in the three months, November to January.

(Abnormally) Positive Septembers
September is usually the weakest month of the year. But when September has a positive return, the last 3 months of the year have a strong positive bias (21-4) and an average gain of 4.84%. For full details, see: When September Flexes Its Muscle

Positive Septembers - Negative Octobers
If the a positive September is followed by a negative October, then the odds for the last two months of the year go to 10-1 with an average gain of 4.71%.

Seasonality When Jan-Oct Returns Are +10%
If the first ten months of the year provide a 10% or more return, then the final two months of the year are 21-3, with an average gain of 4.99% (see table to the left for details). Perhaps more interestingly, there was not a one percent loss in the the 24 observations.

If the end of the year rally doesn’t materialize with the tail wind of the above statistics at its back, it should be viewed as very bearish for the first quarter of 2010.

This is a guest post by Wayne Whaley (CTA):

I’m not sure whether this market reminds me more of my grandfather’s beagle puppies or the current Secretary of State’s husband, but either way he (the market) doesn’t seem to be inclined to hang around the house for long. It looked like this market might show signs of mean reversion in the second half of October, but then yesterday, it caught wind of the third quarter GDP report and wondered off again, allowing the S&P 500 to post it’s 8th straight up month since the bottom was established in March 2009.

So what’s ahead? A couple of considerations from a seasonal vantage point:

First, since 1950, the average annual return on the S&P 500 index is 8.05%. Over half of that annual return (4.25%) has arrived in the three months November to January.

Second, some respected market technicians have argued that since we didn’t get our usual autumnal sell off, that it may come later in the year. I do agree that the market tends to try to confuse as many of us as possible, but it is very possible the 5% sell off in late October was all we needed to rattle a few cages and I am still inclined to believe that the market’s ability to prevail against traditional seasonal headwinds is a sign of forward strength.

Last month, I posted an article “When September Flexes Its Muscle“, that showed that if the market can manage to post a gain in the seasonally weak September month, the market was has a very high probability of finishing the last quarter positive with an average gain of 4.84%.

Below is a table, with an update of those results for the final two months of the quarter, when both September and October are positive.

Since 1950, the November & December time frame, following up September & October , was 13-2, with a median +6.69% return. If you can allow yourself to consider 1968 to be an unchanged data point (-0.18%), then 2007 was the only noticeable loser in the 15 data points. Under the theory, when the market goes against the seasonal trend - go with the market, the 2007 data point provided strong clues as to what was to come in 2008.

There is a meaningful pullback coming. And staying long for the well known, traditionally strong, year end rally almost seems too logical. But I think that given it has been eight in a row with the holidays to go (rhyme intended), we are well advised to stay with the trend at least through January of 2010 or until the tape shares some information with us to the contrary.

Those of you who follow my commentary know that I am also influenced by the three strong breadth thrust “The Mother of All Momentum Thrust Years” we had this year, the last coming in September. However, if the year end rally doesn’t materialize (ala 2007), one would be well advised to take some defensive measures.

Good luck to us all.

Not surprising after the extremely negative sentiment in the US dollar index, the greenback has staged a modest rally. In response, gold has wilted. Here are few perspectives on what may be next for the precious metal:

Elliott Wave International
Arguing for the bearish case, is Robert Prechter of Elliott Wave International. He writes that since 1913, as shown in the chart below, the purchasing power of the US dollar has eroded by 96% (great job Fed!). If gold had simply offset this loss in purchasing power, it would have to have increased 25 times. But instead gold has multiplied in value by 50 times. Therefore, Prechter argues, it is 50% ‘overvalued’.

This is a strange sort of argument because most gold bugs would say that gold’s strength, the very fact that it has gone up so much, reflects positively on the precious metal. Prechter has had a very hot hand lately in timing the stock market so I’m willing to listen to his argument even if it sounds a bit odd. It appears that he implies that gold’s only sensible ‘value’ is to be the anti-dollar. However, I’m not sure that’s a valid point because as far as I’m concerned, gold is just another commodity with all the inherent susceptibilities to manias and panics we ascribe to other more traditional markets like stocks.

While I’m reticent to embrace this line of thinking, I do agree with something else that Prechter wrote recently about gold:
Continue reading ‘What’s Next For The Gold Bull?’

Apologies for the late posting so far this week. I was away at a family wedding and missed the regular scheduled posts.

Brace yourself because we are about to enter the best months of the year for the stock market. This seasonality pattern is most commonly called the “Halloween indicator” and lasts from November to April - where most of the returns have tended to originate historically.

But this year was atypical in that we had a spectacular rally early in the year. In fact, this was arguably the most hated rally since very few purportedly believed in it or predicted it. And yet it happened. In any case, seasonality patterns should not be confused with blueprints. They are merely loose fitting guides to be draped over price action. The stock market certainly does not heed them every cycle.

According to Mary Ann Bartels, a technical analyst ranked second by Institutional Investor magazine, the weakness we should have seen may simply be delayed, rather than skipped outright. Here is a chart comparing the S&P 500 so far this year, compared with the other instances where seasonality was turned upside down:

Source: Bloomberg

While Bartels is looking forward to a correction to end the year, she does expect that to set up a base for further gains next year. She expects the S&P 500 to reach 1325, a further 22% rise from here.

Diligent readers will recall a historical study provided by guest writer, Wayne Whaley where 7 consecutive months of positive return have a surprisingly bullish bias going forward. October isn’t over obviously but with a 3.21% return (so far) we are set for a continuation of the short term strength that defies the intuitive expectation of ‘mean reversion’ after so many positive months.