The good news is:
• A Santa Clause rally is due to begin Wednesday.
Short Term
Seasonal considerations overwhelm everything else.
The second and third days prior to Christmas are often a little weak, but the day prior to Christmas is usually strong. This year, Friday, the day after Christmas, is likely to be a very low volume day that drifts upward, similar to the day after Thanksgiving.
Intermediate term
There is nothing technically to put the Santa Clause Rally in doubt.
There have been no new highs to speak of, but not many new lows either and with a low only a month ago the lack of new highs is not surprising.
The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so declining new low move the indicator upward (up is good).
Seasonality
Next week is the week includes 3 days prior to Christmas and one day after during the 4th year of the Presidential Cycle.
The tables show the daily return on a percentage basis for the 3 days prior to Christmas during the 4th year of the Presidential Cycle. OTC data covers the period from 1963 - 2007 and SPX data from 1952 - 2007. There are summaries for both the 4th year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored. I did not include Friday in the tables, but, since the late 1940's, when Christmas has been on Thursday, the Friday following has never been down.
The average gains for all periods have been positive, but, have mostly been made on the day before Christmas.
Report for 3 days before Christmas.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
| OTC Presidential Year 4 | ||||
| Day3 | Day2 | Day1 | Totals | |
| 1964-4 | 0.09% 2 | 0.39% 3 | 0.59% 4 | 1.07% |
| 1968-4 | -0.08% 5 | 0.09% 1 | -0.31% 2 | -0.29% |
| 1972-4 | -0.35% 3 | -0.64% 4 | 0.15% 5 | -0.84% |
| 1976-4 | 0.22% 2 | 0.53% 3 | 0.04% 4 | 0.79% |
| 1980-4 | 0.95% 1 | 0.04% 2 | 0.14% 3 | 1.13% |
| 1984-4 | -0.16% 4 | -0.09% 5 | 0.63% 1 | 0.39% |
| Avg | 0.12% | -0.01% | 0.13% | 0.23% |
| 1988-4 | -0.12% 3 | 0.24% 4 | 0.22% 5 | 0.34% |
| 1992-4 | -0.24% 2 | 0.32% 3 | 0.44% 4 | 0.52% |
| 1996-4 | -0.56% 5 | -0.71% 1 | 0.63% 2 | -0.64% |
| 2000-4 | -7.12% 3 | 0.31% 4 | 7.56% 5 | 0.75% |
| 2004-4 | 1.08% 2 | 0.28% 3 | 0.17% 4 | 1.53% |
| Avg | -1.39% | 0.09% | 1.80% | 0.50% |
| OTC summary for Presidential Year 4 1964 - 2004 | ||||
| Averages | -0.57% | 0.07% | 0.93% | 0.43% |
| %Winners | 36% | 73% | 91% | 73% |
| MDD 12/20/2000 7.12% -- 12/23/1996 1.27% -- 12/21/1972 .99% | ||||
| OTC summary for all years 1963 - 2007 | ||||
| Averages | -0.06% | 0.28% | 0.32% | 0.54% |
| % Winners | 56% | 67% | 64% | 64% |
| SPX Presidential Year 4 | ||||
| Day3 | Day2 | Day1 | Totals | |
| 1952-4 | 0.57% 1 | -0.42% 2 | 0.08% 3 | 0.23% |
| 1956-4 | -0.24% 3 | -0.78% 4 | 0.65% 5 | -0.36% |
| 1960-4 | 0.81% 3 | -0.28% 4 | 0.09% 5 | 0.61% |
| 1964-4 | -0.06% 2 | -0.21% 3 | 0.00% 4 | -0.27% |
| 1968-4 | -0.59% 5 | -1.06% 1 | -0.16% 2 | -1.81% |
| 1972-4 | -0.34% 3 | -0.72% 4 | 0.63% 5 | -0.43% |
| 1976-4 | 0.55% 2 | 0.47% 3 | 0.12% 4 | 1.14% |
| 1980-4 | 1.56% 1 | -0.35% 2 | 0.43% 3 | 1.63% |
| 1984-4 | -0.47% 4 | -0.52% 5 | 0.76% 1 | -0.23% |
| Avg | 0.14% | -0.44% | 0.35% | 0.06% |
| 1988-4 | -0.03% 3 | -0.18% 4 | 0.36% 5 | 0.14% |
| 1992-4 | -0.09% 2 | -0.29% 3 | 0.17% 4 | -0.21% |
| 1996-4 | 0.42% 5 | -0.26% 1 | 0.55% 2 | 0.71% |
| 2000-4 | -3.13% 3 | 0.80% 4 | 2.44% 5 | 0.11% |
| 2004-4 | 0.90% 2 | 0.34% 3 | 0.05% 4 | 1.29% |
| Avg | -0.39% | 0.08% | 0.71% | 0.41% |
| SPX summary for Presidential Year 4 1952 - 2004 | ||||
| Averages | -0.01% | -0.25% | 0.44% | 0.18% |
| %Winners | 43% | 21% | 86% | 57% |
| MDD 12/20/2000 3.13% -- 12/24/1968 1.80% -- 12/21/1972 1.06% | ||||
| SPX summary for all years 1952 - 2007 | ||||
| Averages | 0.09% | -0.01% | 0.27% | 0.34% |
| % Winners | 55% | 47% | 69% | 59% |
Money supply (M2)
The chart below was provided by Gordon Harms. Money supply has growth has been accelerating modestly.
Conclusion
New lows have remained at benign levels and the secondaries have been stronger than the blue chips.
I expect the major indices to be higher on Friday December 26 than they were on Friday December 19.
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All of the major indices were up last week except the Dow Jones Industrial Average which was down 0.59%. So I am calling last weeks negative forecast a tie.
Thank you,
