Trading in December is typically holiday-inspired, driven by a buying bias throughout the month. However, the first part of the month tends to be weaker due to tax-loss selling and year-end portfolio restructuring. Over the last 21 years, December’s first trading day has generally been bearish for both the S&P 500 and the Russell 2000. A modest rally through the sixth or seventh trading day often fizzles out as the month progresses. Around mid-month, however, holiday cheer tends to take over, and tax-loss selling pressure fades, pushing the indexes higher with a brief pause near the end of the month. In election years, Decembers follow a similar pattern but with significantly larger historical gains in the second half of the month, particularly for the Russell 2000.
This serves as our first market indicator for the New Year. Years when the SCR fails to materialize are often followed by flat or down markets. Of the last seven instances where our SCR (the last five trading days of the year and the first two trading days of the new year) did not occur, six were followed by flat years (1994, 2004, and 2015), two by severe bear markets (2000 and 2008), and one by a mild bear market that ended in February 2016. The absence of Santa this year was likely due to temporary inflation and interest rate concerns that quickly dissipated. As Yale Hirsch’s now-famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”
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| The indicator is simply the difference in "Smart Money" confidence versus "Dumb Money" Confidence. If the Dumb Money Confidence is at 100%, then that means that these bad market timers are supremely confident in a market rally. And history suggests that when these traders are confident, we should be very, very worried that the market is about to decline. When the Dumb Money Confidence is at 0%, then from a contrary perspective we should be [buying stocks], expecting these traders to be wrong again and the market to rally. Buying the market the day this indicator flashes green, and simply holding long for three months, makes money 95% of the time (Jason Goepfert @sentimentrader). |