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.
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