Some Seasonal Support This Week

12/15/08 9:20 AM EST

Good Monday morning...we begin the day with mixed trading in the pre-market futures as the weekend news flow was relatively quiet.  The macro tells (currencies, commodities, fixed income) are a bit mixed as oil is jumping but bond yields are declining once again.  We should see both rise (and the Yen fall) if an equity market rally here is going to stick.

We have a few important economic releases this week, mainly Tuesday morning, but the big news will be Tuesday afternoon's Fed announcement on rates.  Traders will be anxiously awaiting their accompanying statement for hints on any extraordinary measures that are being taken to help the economy along.

It's also expiration week for December options and futures contracts.  Going back to 1996, the market has rallied during option expiration week when there is a scheduled FOMC meeting 82% of the time (14 out of 17).  It was up 12 of the last 13 times, dating to late 2000, averaging a return of +1.7%.  Mondays of the weeks were weak, being positive 46% of the time with an average of -0.4%, but from Monday's close through the balance of the week, there was a definite positive bias.

Ignoring the FOMC for a moment, there is some positive seasonality to this week anyway.  Option expiration week during December has shown a positive bias since the inception of the S&P 500 futures (in 1982, using Bloomberg continuous contract data) on 24 out of 26 years, averaging a return of +1.6%.

Another slight positive should be the good performance by semiconductors on Friday.  We've discussed that sector's "canary in a coal mine" quality a few times over the years, and it's one of the better sector tells.  Looking at any time the SMH Semiconductor HOLDR rallied at least 3% to a new two-week high, while the S&P 500 fund failed to close at its own two-week high, over the next three sessions the S&P rallied 66% of the time by an average of +0.7%.  Not a huge edge there, but it's better to see the semis leading rather than lagging.

We left off last week with an upside reversal off of a large gap down open, as the indices followed through on their historical tendency to recover from dramatic openings like that.  In the process, the major indices held the support levels we'd been looking at for awhile, and combined with everything else we discussed this week, the outlook over the coming month(s) continues to look alright.

We had a vaguely similar scenario in October, which failed during early November, and that's a concern.  But given the developments on Monday and Tuesday and the other positives that have been gathering, I'm willing to give the idea of an imminent intermediate-term rally another shot.

For the short-term, a few of our shortest-term guides are flirting with overbought, but the STEM.MR Models are well below "danger" levels.  There is plenty of potential resistance just above, and I suspect that if we reach last week's highs while registering a few more overbought indicators before the FOMC meeting, we'll be getting a quick pullback.  I'm still watching the support levels we looked at last week (roughly 850 on the S&P and 1140-1150 on the NDX), and expect any re-visitation of those areas will lead to another bounce, given the seasonal tendencies discussed above.  815 and 1100, respectively, are far larger support areas, but if we fall that far I'd be surprised.