Short-term Risk Level: 5
Bottom Line
After yet another volatile pre-market session,
buyers managed to enjoy a fairly steady intraday uptrend. Perhaps the
December Arms Index extreme will mark
yet another monthly low - there isn't much among our indicators suggesting
otherwise, and we'd focus on the long side as long as we hold above Thursday's
low.
Chasing A Positive Year?
Not So Much
If the S&P gets above 1257.64 again, it will turn
positive for the year. It makes sense to think that if that happens,
investors will become a little more emboldened to push into year-end.
Since 1928, there were 5 other years when the S&P
500 turned positive for the year sometime in December,
after having traded most of the past month (at least) in negative-for-the-year
territory. Here are the returns into year-end:
12/11/48: -0.9%; 12/29/70: +0.1%
12/01/78: -0.2%; 12/18/84: -0.5%
12/14/87: +2.0%
That's pretty lackluster. There were 17 times when at least the day before
was negative for the year. In those case, the next day was positive 41% of
the time, and the next week 53% of the time.
Into year-end, the index
sported a positive return 41% of the time, averaging +0.1%. Again, pretty
lackluster. There doesn't seem to be much evidence that turning positive
for the year will necessarily spur further buying pressure.
Big Q4 Gain = Q1 Gain, Too
If the S&P doesn't quite make 1257.64, but at least
closes the month above 1245, then it will have enjoyed a 10% gain for the
quarter.
Historically,
that's been a good sign for the next few months. The table to the right
shows every other time since 1928 that the S&P managed to score a 10% or
greater gain during the 4th quarter.
The
table shows the S&P's return during the 1st quarter of the next year, along
with the drawdown (maximum loss at the worst point during the next three months)
as well as the maximum gain.
Out of 13 precedents, there were 12 winners.
The sole loss was about as tiny as you can get (-0.06%). The next 2, 3 and 4
quarters were all positive, but only a bit better than random.
There was never a -10% or worse drawdown during
the next 3 months. There were only 2 drawdowns greater than -5%,
compared to 9 rallies of greater than +5%. That looks pretty good if we
can maintain this momentum into the end of the year.
