DEFINING SANTA CLAUS RALLY -- BEST THREE MONTH SPAN ENDS IN JANUARY -- SECTOR SEASONALITY FAVORS ENERGY -- SEVERAL SECTORS END SEASONAL RUNS DURING JANUARY
WE'RE IN SANTA TIME ... We're right in the middle of the Santa Claus rally and two-thirds of the way through the strongest period of the year for stocks. According to the Stock Traders Almanac, the Santa Claus rally encompasses the last five trading days of the old year and the first two of the new year. That puts this year's Santa Claus rally from December 24 (last Thursday) to January 5 (next Tuesday). The month of January also ends the strongest three month period that runs each year from November through January. That makes January a good month to take stock money off the table. In many ways, the 2009 rally has been very similar to the one that took place during 2003. Both bottomed in March and rallied through the end of the year. Chart 1, however, shows that stocks peaked during the first quarter of 2004 and corrected into the following autumn before turning back up again. There's no guarantee of a repeat performances in 2010. But there is a lot of seasonal precedent for stock rallies to stall in the early months of a new year.
Chart 1
SEASONAL SECTOR PLAYS ... The Almanac also carries a table showing which stock sectors start new uptrends this time of the year and which ones end their uptrends (or at least stall). A lot of those seasonal uptrends start during October and are already well along. The only sector that usually turns up during December is energy. Chart 2 shows the Energy SPDR (XLE) rising above its 50-day average a week ago. That fits into its positive seasonal pattern. Sectors that usually start to experience seasonal weakness during December are gold & silver, semiconductors, and telecom. Charts 3 shows gold and silver stocks peaking at the start of December. Semiconductors and telecom (Charts 4 and 5) are starting to pull back from short-term overbought conditions. Seasonal tendencies appear to favor some yearend profit-taking in those two last groups.
Chart 2
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Chart 5
JANUARY SEASONAL PEAKS ... The month that traditionally ends the most sector uptrends is January (which may explain why January ends the strongest three-month span of the year). Sector trends that usually start to weaken during January are computers, Internet, technology, healthcare providers, and utilities. All three are in short-term overbought conditions as shown by their 14-RSI lines and have been recent market leaders. It seems logical to assume that any profit-taking during January in those groups would have a retraining effect on the stock market as a whole.
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