Santa Comes to Wall Street

Maybe St. Nick gets into the eggnog before he visits Wall Street each year, because the trading pattern has been a step up, then a stumble down before recovering at the end of the year. I first noticed this Up-Down-Up pattern back in the early 1970s and, as you see from Chart 1, it is still with us.

The question is, how do we take advantage of it? Personally, I see several ways.

The tabulation in Chart 2 shows the results of buying the *S&P 500 E-minis futures contract on the Xth trading day of December, with an eleven-day hold. We immediately see the power of the mid-to-late-month rally, which I will get to in a moment.

Before that, however, notice the 80% accuracy for the second trading day in Chart 2. Let's delve into that trade.

We see above the results of buying on the 2nd trading day of the month (TDOM) and holding for 1 to 21 days. Holding the trade for 4 days nets $18,337 of profits with 84% accuracy. Holding longer, for 20 days, and you do better (the trend is our friend), netting $39,375... but our accuracy drops to 76%.

There is a lesson here: the higher the accuracy, the lower the profits, and the higher the profits, the lower the accuracy. That is a lesson all traders need to --- or will --- learn.

That's the first trade for the month. Now let's look at a mid-month trade.

Chart 4 is the same as Chart 2, but now we're going to focus on that middle-of-the-month rally. There is a little Christmas red early in the month. but look at all the Christmas green starting at TDOM 14, with good profits lasting until TDOM 19. We have a seasonal sweet spot: TDOM 16, with $30,775 in profits.

Merry Christmas!

What happens around the middle of the month is... Santa leaves the North Pole to deliver gifts that include a rally in stocks.

Chart 5 shows buying on the 3rd trading day prior to the Christmas holiday, with various X day holds. The optimal length of the trade has been 4 days with 23 out of 25 winning years. Will it work this year? There are no guarantees. That is not the question, though; the question is, do you now have a bias in speculating? Clearly, the answer is yes.

*In all these examples, I am buying on the opening and am using a $3,100 stop. Yes, that's big, but the S&P 500 E-minis futures contract has become more volatile with larger ranges. The exit calls to hold X days, then pitch the trade on the first opening that shows a profit.

I know most of you don't trade futures. They are good for testing. For trading, you can use any of the popular broad base stock market ETFs. They all move together.

Gold Goes Too

Gold has also shown a propensity to rally at year-end, a pattern even the most ardent Gold Bugs are not aware of. Be you a bug or not, this is a play in the futures market --- or you can use the ETF for gold, which is GLD. This ETF closely mimics the price of physical gold.

First, let's look to see what the seasonal bias is for Gold/TLT using my true seasonal (not at all like any of the other seasonal indicators; check back issues for an explanation).

Well, well, just look at that! The seasonal pattern of Gold turns up at the end of the year. Shhhh... let's not tell all the talk show hosts touting Gold for all the wrong reasons about this reality. They can't handle the truth.

To crack to the code of the best way to trade this pattern, we'll use my TDLIM (Trading Days Left in the Month) concept, introduced back in the 1980's.

We can start this test by looking at what happens starting with 15 trading days left in December. As you can see, Gold has always had 19 trading days. Some Decembers may have 22 trading days, others 18. The point is every unfinished month has at least 1 day left in trading. So, if we look at "days left" our measurement is consistent.

What we see is that the optimal trade has been to buy on the 5th trading day left in the month and hold for 6 sessions, before looking to exit on the first profitable opening (use a $1,700 stop loss). That trade clocks in at an 84% accuracy rate with over $51,000 of gains. Note all the green (profits), starting with 8 days left in the month. Clearly, we have a bias here.

You can increase your accuracy to 89.4% if you hold for just a day. As always, the longer you hold, to a point (6 days in this case), the more you make while accuracy declines. We never get both in this business.

A Look at the Dreaded Yield Curve

The fearmongering bears continue pointing to the yield curve (the difference between 2-year and 10-year bonds) as a sure sign of a coming depression. In Chart 9, you see the curve in black, with its most dominant cycles of about 40 months overlaid in green. Bull or bear, we can all agree there are cycles to the peaks and valleys in the curve.

Can the cycle of the curve help us in understanding the future direction of stock prices?

That's the $64,000 question. Lucky for us, it is easy to answer. All we have to do is compare the Dow Jones Industrial Average vs. the cycle of the yield curve to see if there is at least correlation... if so, then we have to think if there is also causation.

Wow, look at that! In Chart 10, I have dropped the curve, but kept the cycle on the chart, then added the Dow Jones. At least up to 2016, every cycle low in the curve foreshadowed a large rally in stock prices. The cycle also did a decent job of alerting investors when to expect stock market weakness. Perhaps the bears are onto something here; the curve can predict bear markets, or at least the cycle of the curve can be fortuitous in the art of forecasting.

With that understanding, our next chart comes forward in time to now; everything stays the same. Same cycle, same curve, I am just expanding our view point.

Keep in mind that the green line, the cycle, is known in advance. Thus, 2016 and 2020's amazingly good buy points could have been known ahead of time. What the cycle of the curve is telling us now is to expect higher prices with the potential for lower stock prices coming... but not until late 2025.

From what I see now, that late 2025-26 time frame is when we will have a bear market.

Our last chart gives an "up close and personal view" of the forecast. No, stocks will not precisely follow this. But, yes generally, that is the expectation.

Morgan Stanley Says...

This large vessel of market wisdom says don't trust the current rally, in part, because they see a slowdown in economic growth. They went on record saying, "Despite blowout readings for third-quarter GDP, other data suggest a softening in economic activity. The Conference Board's Leading Economic Index fell by a worse-than-expected 0.7% in September, marking its 18th straight month of declines. Manufacturing weakened sharply in October, according to the Institute for Supply Management's index, and last week's nonfarm payrolls report revealed a weaker-than-expected 150,000 new jobs in October and an uptick in the unemployment rate to 3.9%."

They may be correct, but I doubt it. Here's why...

The best way to look at GDP growth is in the following data series from the Fed that looks at GDP, outside the vacuum I think Morgan uses. You see, most GDP studies just look at total GDP changes, whereas I like looking at it per capita. Clearly, there can be GDP growth just because of a large bump in population. That growth would not be due to an increase in productivity.

It is fair to say the YOY (year over year) change in this measure of GDP has been coming down before every recession in the last 70 year. As you see it is currently up --- not down --- projecting more growth. This is pretty amazing; GDP growth is up!

Now let's look at the cycle of GDP. These next charts show GDP rate of change in black. The active cycle is in red. Keep in mind the cycle tops and bottoms are known in advance as you study these charts.

The future of GDP is shown in Chart 15. The cycle calls for continued growth the next year or so. How that fits into stock prices is shown in Chart 16.

Keeping in mind the cycle highs and lows (in red) are known in advance, we can sure see how stocks relate to GDP. The model suggests lower GDP is coming, but not until late 2025.

Why All This Matters --- The 3 P's of Investing Success

To succeed at this business, you need three attributes; Perspective, Patience, and Perseverance. Without perspective, you soon lose patience and then cannot persevere. My goal here is to help give you perspective so that you are not bandied about by the winds and news that roar down Wall Street.

Have you noticed how most of the talking heads on TV keep getting toasted with their commentaries? Why? I think it's because they are reactionary to the news/views of the day. Their perspective stretches out to the next news story. They jump on that as opposed to letting perspective put it in its place.

Perspective comes from the study of cycles and fundamentals.

Wealth Is Not Health

Talking Telomeres

In 1961, Leonard Hayflick discovered that our cells can only divide 30 to 90 times before cell division stops, called the "Hayflick limit". Cells in the body are constantly lost due to injury, sickness and just unavoidable wear and tear and need to be replaced via cell division. Once this limit is hit, cells in the body can be lacking. This leads to muscles being weaker, organs not functioning as well, tissues being less flexible, and generally the body being more aged. This is one of the main causes of aging.

We all know that our cells divide to keep our bodies going. But many do not realize the damage from this can be done at a region of the DNA end of the cells called the telomeres. When the telomeres at the end of the cells --- think of them as protective caps --- become too short, the cell can no longer divide. So it dies off.

Longer telomeres protect the end or terminal areas of DNA from degradation. Shorter telomeres are associated with an increase in death from heart disease, cancer, and infectious diseases. Telomere shortening is a sign of age-related disease and decreased survival times. Mice with longer telomeres live substantially longer that ones with shorter telomeres.

You may have read the March (of 2023) article about telomeres in The Wall Street Journal. If so, you recall they reported on a study that showed people over 60 (those with shorter telomeres) were three times more likely to die from heart disease.

Back in 2021, telomeres were discussed in Biomedicines by three doctors who concluded shorter telomeres are associated with accelerated aging and higher risks of total mortality. Hence, about 10 years ago, the longevity community hopped onto the idea of finding ways to increase the length telomeres in order to extend life and quality.

Yale Hirsch, yes, the Stock Trader's Almanac guy, organized a supplement company with a product that would supposedly extend telomeres. The product is based on research that shows the root of the astralagus plant contains very small concentrations of a powerful molecule that has been proven to activate telomerase production in adult cells. This miraculous anti-aging molecule is called Cycloastragenol.

Did that help Yale? Well, he lived to be 98. Not bad. I began taking the supplement (Telostep) several years ago, then took a blood draw to see how my telomeres were doing. Here is the chart of the results.

At that time, I was 73. The black circle shows the length of my telomeres, about .80. That was much higher than most people that have taken the same number of trips around the sun as I had. Looking to the left, see red line? We see that reading is what would be a high, good length for someone about 45.

Other supplements to keep telomere length, clinically proven (Nutrients, August 2022), are Selenium and Coenzyme Q10. In one study of a combination of these two, shortening of telomeres was statistically better in the group taking the supplements than the control group. (PLoS One, 2015)

The problem with most longevity products or ideas is we cannot measure results. With this one, we can. I will be tested later this month and will share those current results with you. Also, next month, I will detail my idea on cellular senescence, one of the most powerful things I do.

If you are into all this longevity stuff, one of the best sites I have found is written by Josh Mitteldorf. I really like the search function to see what his astute readers are doing and have found out.

Market Timing

We gave you this chart last month, saying, "The red lines in the charts represent an important cycle or better yet, an emotional wave. We have seen it 21 times in the stock market as far back as I have data - since 1885. Of those 21 occurrences, 20 have had higher prices at the end of the wave than they had at the start. To my way of thinking, as long as this emotional wave is in effect, hold ‘em; stay long and/or buy any market breaks."

That's now 22 occurrences with 21 wins, as we are now in an historic stock market up move. What a rally it has been; an R&R rally. Relentless to the bears & rewarding to the bulls.

What's next? Well, we remain in a bull market. There is no end to it in sight for at least the next few months. On an intermediate term basis, keep in mind the seasonal chart shown earlier and the next chart, my newest cycle projection.

If You Had a Bad 2023....

Then consider the results shown here of the hot shot newsletters, all in the running for the "Turkey of the Year", awarded annually by Travis Johnson in his Stock Gumshoe service. His letter divulges and exposes the stocks you see so widely hyped by the larger newsletter guys.

As you know, there is a huge publishing business trying to drum up subscriptions by touting special-situation stocks. They get you in the door for just a few dollars and a hoped-for hot stock. After you enter their house, they then step you up to the "special" service for over $2,000 a year. Sometimes they are right. Usually the stocks just meander.

This is not unique to these publishers. The prima donnas at Goldman Sachs had their fair share of turkeys this year as well. This is a very hard discipline to be right in almost all the time.

Follow Up

I do all I can to not win these turkey awards. Hopefully, we don't walk away with the trophy, as we are very selective and look for when the advantages are clearly with us. That's the problem with the talking heads on TV; they have to be talking all the time, so they become reactionary. Nonetheless, do not expect all my trades to be winners.

In our November letter, we commented, "Typically, Bonds begin to rally on the fourth trading day of the month. This trade has legs."

Stock traders could take advantage of this using the ETF for bonds, TLT. One of my key indicators, which we call the "Pinch and Paunch", also foreshadowed the move: "we see that our Paunch indicator has entered the buy area" (Chart 32 in that November letter).

We got lucky on this one. If you are still in, look to take profits.

We had two trades for the stock indices. The first we wrote was: "The optimal trade has been to buy on the opening of the fourteenth Trading Day of November with a $3,100 Stop." Then, in our mid-month Family Meeting, we said to "buy the ES or stock ETFs 3 to 4 days before the [Thanksgiving] holiday."

As it turned out, those were both the same entry date. Again, we were blessed with luck; those short-term trades are over.

Individual Stock Commentary

Our shared problem...

I am having a problem doing this report that I need to share with you. Here it is; some want just short-term trades. Some trade the intermediate swings. Lots of you seem to be long-term investors. Others want stocks to move right now, and many ask about stocks I have ever heard of before. I simply am not good enough to cover all these bases. I am doing my best to get the letter more organized in content and follow up. Please bear with me. This is a work in progress.

Specific Stocks

The problem of late has been that the huge rally lifted all the boats (stocks), even if they had leaks. Too many look too good. It's hard to separate the real winners... there are just too many good stocks to follow now.

My "look at list" includes Adobe, Advanced Micro Devices, Shopify, CrowdStrike, Trade Desk, NY Times, Roblox, Netflix, Costco, Microsoft, Chevron, Chipotle, eBay, Sirius... and the list goes on and on in addition to the ones (below) we have commented on.

In October, we went on record saying. "The strongest stocks have been Tesla Inc. (TSLA), Meta Platforms Inc. (META), Alphabet Inc. Class C (GOOG), and Crowdstrike Holdings Inc. (CRWD)."

In November we focused our guns with this comment: "We see here CRWD has clearly been the strongest of these stocks, designating it as one that rallied the most. META and NVDA have also held up better than most stocks; short and intermediate traders will want to focus on these three.

"...take a dash to StockCharts.com to see that DraftKings (DKNG), and other mentions from when we began this journey – e.g. Lululemon (LULU) and Walmart (WMT) – have also shown unusual strength."

Then we added AAL and IBM as special situations, along with TGT.

IBM was our selection to rally based on just the seasonal pattern. This year, like in most all years, readers were given a special treat of a 20+ point rally for a 15% gain. See, they can work when carefully selected.

Big problem here; we have been covering too many stocks. Lucky for us, most all have rallied. Very lucky, with several substantial gains. Yet they are still strong stocks worth holding until the time mentioned below.

Best Bet in the AI wave?

We pointed out ASML holdings as what I thought to be the best play in the artificial intelligence run-up in stock prices. A direct quotation was, "Only AMSL has held and rallied. Clearly, this stock is in strong hands. It has responded well to buying on a break out of 7-to-8-day highs."

At this point, I think it has been overworked, overdone. The stock went from the $575 to almost $700, one heck of a run. As you can see from the following chart, the Seasonal Pattern is now down. Let's take our profits and run. I believe there will be a better buy point later on.

What to Do Now

Doubting Thomas bulls, of which there are no shortages, may want to pay attention to a chart shown last month; the relationship between crude oil prices and stock prices. Given that we have recently seen an historic move to the upside here, people are shaking their heads, stumbling into walls, and asking, "Why didn't I see that? What would've indicated it?"

One answer was given in that chart from a month ago, shown here again. As I've always said, charts don't move markets, conditions do. One of those conditions is energy prices. Of course, there are others such as interest rates, unemployment, gross domestic product, and on and on. The trick of the game is to figure out which ones are most influential in the current market.

Crude Oil has been a good harbinger of the general direction and timing for significant moves in the Dow Jones industrial Average, as has been noted. I suspect it will continue that way into the middle of 2024. If you are skittish about this bull market, please consider Chart 25. Still worried? Look at the cycle projections made in these letters one or two months back.

Investors, people who don't look at their stocks every day or hour, should continue holding as I believe we are still in a bull market. This bull market is not over by a longshot.

However...

Traders, even intermediate-term traders, may want to consider locking up profits at the end of this year. Typically, right after the first few trading days in January, stocks begin a pullback, or at least a selloff. This is usually a prelude into a very good buying opportunity in March. The seasonal pattern in Chart 26 shows exactly what I'm talking about.

If you have not learned this by now let me repeat, "the market does not explicitly follow the seasonal patterns." We can say, that generally speaking, year in and year out, this is how price has performed and most likely will at the start of 2024. That's why I think it's time to have very tight trailing stops, if not selling into any additional strength following the rally that should take place at the end of the year.

The most interesting point here is that, if prices don't make a higher high at the end of December, then that means the market is seasonally weak and we would expect a larger selloff as the new year unfolds its colors.

In terms of the stocks to look, at or maybe even take a position in, I think we have a full basket of stocks at this time. We have been blessed to be part of a great historic run to the upside. Let's take advantage of that by locking down profits. Be out by January 11th of 2024.

What Short Term Cycles Suggest

Most of our long stocks trade on the Nasdaq, so I did a cycle analysis of the shorter-term cycles. Here is what I found.

As you can see, there is a cycle peak coming up just after the new year, which confirms the seasonal pattern. I see this as one more reason to take profits. Note that I did not say sell short (that time will come) --- I said to take profits.

The Next Family Meeting Will be December 14th

Tune in 2pm Eastern Standard Time!

And... Coming Next Month

Coming in the January letter: The best stocks in 2024!

There will be 4 of them for your special attention.

Also: The best projected time to buy for 2024!

I think I have nailed this, but you must be patient.

Until then...

Good Luck and Good Trading,

Larry Williams

If you have questions for Larry that you'd like addressed in future postings, please email familygathering@stockcharts.com.