SANTA CLAUS RALLY MAY ALREADY HAVE STARTED -- BOUNCE IN SMALL CAPS SUGGESTS JANUARY EFFECT MAY HAVE ALSO STARTED EARLY -- SEASONALS AND CHARTS FAVOR ENERGY STOCKS -- GOLD MAY BE TURNING UP AS WELL
SANTA CLAUS RALLY... One of the most valuable investment books that I use is the annual Stock Trader's Almanac published by Jeffrey and Yale Hirsch. The book is published each year and contains a wealth of seasonal market information. I rely on it quite heavily as do many other professional analysts. Virtually all of the seasonal information that you read here (and hear on TV) is taken from the Almanac. [You can order a copy of it from the Stockchart Online Bookstore]. I'm going to use it today to discuss two yearend seasonal patterns that you'll no doubt be hearing and reading about. The first is the so-called Santa Claus rally. According to the 2008 Almanac, the Santa Claus rally brings a "short, sweet, respectable rally within the last five days of the year and the first two in January". That puts it mainly between Christmas and New Years Day. There's a caveat though. According to the Almanac, "Santa's failure to show tends to precede bear markets". That makes what the market does between now and yearend especially important. There's another reason the next week is important. A yearend rally is needed to prevent some monthly technical indicators from turning bearish. Judging from today's strong bounce, the yearend rally may have already started and is being led by a strong technology sector. The Nasdaq/S&P 500 ratio in Chart 1 appears to be turning up after falling for six weeks. The rest of the market usually does better when the Nasdaq is leading it higher.
Chart 1
JANUARY EFFECT NOW STARTS IN MID-DECEMBER ... The so-called "January Effect" refers to the tendency of small cap stocks to outperform large caps during the month of January. According to the 2008 Almanac, however, "most of the January Effect takes place in the last half of December". The Hirsch's suggest that if you plan to take advantage of the small cap surge, it's probably a good idea to get a head start in mid-December. Recent chart action appears to support that view. Chart 2 shows the Russell 2000 Small Cap Index jumping sharply over the last couple of days after bouncing off chart support along its August lows. Chart 3 is even more telling. It plots a ratio of the RUT divided by the S&P 500. This week's jump in the small cap/large cap ratio suggests that the January Effect favoring small caps may have already begun. That may also give a yearend boost to the rest of the market.
Chart 2
Chart 3
SECTOR SEASONALITY FAVORS ENERGY ... This year's Stock Trader's Almanac also provides a "Sector Index Seasonality Table" which show which market sectors do best at various times in the calendar year. The only sector that generally starts its period of seasonal strength in December is Energy, which usually remains strong until the following June. Right on cue, the Energy Sector SPDR (XLE) has broken out to a new record high today after a couple of months of corrective action (Chart 4). Its relative strength ratio (bottom of chart) has broken out as well. Energy prices are starting to rally again as the dollar weakens against the Euro. That's also giving a nice boost to gold.
Chart 4
GOLD MAY BE GETTING READY TO RUN AGAIN ... Earlier in the week, I showed a possible "symmetrical triangle" forming in the gold market. I also suggested that after three pullbacks to the lower line (see arrows), gold should be ready to attempt an upside breakout. Chart 5 shows the Gold ETF (GLD) up the equivalent of $15 today and challenging its upper resistance line. A decisive close above that line would be a short-term buy signal for bullion. Gold shares are up nearly 4% today and are the market's strongest group. Chart 6 shows the Market Vectors Gold Miners ETF (GDX) bouncing off its 200-day moving average.
Chart 5
Chart 6
