The good news is:
• We are in the seasonally strongest period of the year. Since 1928, during the last 5 trading days of the year, the S&P 500 (SPX) has been up 82% of the time with an average gain of 1.11%. During the 3rd year of the Presidential Cycle it has been up 95% of the time. 1987 was the only down year.
Short Term
Seasonal considerations overwhelm everything else in the short term.
Intermediate Term
Indicators of all styles and durations get distorted this time of the year when the market drifts upward on low volume with the secondaries leading.
The chart below from FastTrack (http://fasttrack.net/) has been updated from last week. It covers the past 9 months showing the SPX in green, the Russell 2000 (R2K) in red and a relative strength indicator called Accutrack (AT) as a histogram in yellow. When AT is rising and/or above the neutral line the R2K is outperforming the SPX, a favorable condition. AT rose sharply last week reflecting the strong performance of the R2K.
Seasonality
Next week includes 4 of the last 5 trading days in the 3rd year of the Presidential Cycle.
The tables show the daily change of the NASDAQ composite (OTC) and SPX during the last 5 trading days during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2003 and SPX data from 1931 - 2003. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
Historically next week has been one of the strongest of any year.
Report includes the last 5 days of December
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 3 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1963-3 | -0.46% 2 | 0.20% 4 | 0.83% 5 | 0.34% 1 | 0.96% 2 | 1.88% |
| 1967-3 | -0.25% 5 | -0.17% 2 | 0.08% 3 | -0.05% 4 | -0.16% 5 | -0.55% |
| 1971-3 | -0.21% 1 | 0.21% 2 | 0.57% 3 | 0.36% 4 | 1.02% 5 | 1.94% |
| 1975-3 | 0.65% 3 | 1.00% 5 | -0.25% 1 | -0.35% 2 | 1.24% 3 | 2.28% |
| 1979-3 | -0.13% 1 | 0.03% 3 | 0.15% 4 | 0.40% 5 | 0.21% 1 | 0.65% |
| 1983-3 | 0.12% 5 | 0.05% 2 | -0.04% 3 | 0.18% 4 | 0.56% 5 | 0.86% |
| Avg | 0.03% | 0.22% | 0.10% | 0.11% | 0.57% | 1.04% |
| 1987-3 | 0.52% 4 | -2.28% 1 | -0.02% 2 | 1.28% 3 | 0.23% 4 | -0.27% |
| 1991-3 | 1.04% 2 | 1.77% 4 | 1.14% 5 | 2.48% 1 | 1.14% 2 | 7.58% |
| 1995-3 | 0.61% 5 | 0.24% 2 | -0.12% 3 | -0.56% 4 | 0.95% 5 | 1.11% |
| 1999-3 | 0.15% 1 | -0.08% 2 | 1.75% 3 | -0.11% 4 | 0.80% 5 | 2.50% |
| 2003-3 | -0.28% 3 | 0.20% 5 | 1.69% 1 | 0.17% 2 | -0.32% 3 | 1.45% |
| Avg | 0.41% | -0.03% | 0.89% | 0.65% | 0.56% | 2.47% |
| OTC summary for Presidential Year 3 1963 - 2003 | ||||||
| Averages | 0.16% | 0.11% | 0.53% | 0.38% | 0.60% | 1.77% |
| % Winners | 55% | 73% | 64% | 64% | 82% | 82% |
| MDD 12/29/1987 2.30% -- 12/28/1995 .69% -- 12/30/1975 .60% | ||||||
| OTC summary for all years 1963 - 2006 | ||||||
| Averages | 0.25% | 0.19% | 0.21% | 0.25% | 0.34% | 1.24% |
| % Winners | 60% | 67% | 53% | 67% | 79% | 84% |
| MDD 12/29/2000 3.41% -- 12/31/2002 3.34% -- 12/29/1965 2.40% | ||||||
| SPX Presidential Year 3 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1931-3 | 0.13% 4 | -2.51% 1 | 2.58% 2 | 1.76% 3 | 0.25% 4 | 2.20% |
| 1935-3 | 0.23% 4 | -0.08% 5 | -0.61% 6 | 2.07% 1 | 0.98% 2 | 2.59% |
| 1939-3 | -0.56% 2 | -0.57% 3 | 0.89% 4 | 0.32% 5 | 0.24% 6 | 0.33% |
| 1943-3 | -0.17% 1 | -0.95% 2 | 0.00% 3 | 1.83% 4 | -0.17% 5 | 0.54% |
| 1947-3 | -0.85% 5 | -0.13% 6 | -0.40% 1 | 1.20% 2 | 0.53% 3 | 0.34% |
| 1951-3 | -0.42% 3 | 0.90% 4 | 0.17% 5 | 0.00% 6 | 0.34% 1 | 0.98% |
| 1955-3 | 0.20% 5 | -0.62% 2 | -0.38% 3 | 0.22% 4 | 0.73% 5 | 0.16% |
| 1959-3 | 0.07% 4 | -0.03% 1 | 0.54% 2 | 0.79% 3 | 0.20% 4 | 1.57% |
| 1963-3 | 0.22% 2 | 0.47% 4 | 0.16% 5 | 0.16% 1 | 0.62% 2 | 1.63% |
| Avg | -0.16% | 0.12% | 0.02% | 0.47% | 0.48% | 0.94% |
| 1967-3 | -0.19% 5 | 0.06% 2 | 0.68% 3 | -0.02% 4 | 0.60% 5 | 1.14% |
| 1971-3 | 0.21% 1 | 0.99% 2 | 0.26% 3 | -0.42% 4 | 0.30% 5 | 1.34% |
| 1975-3 | 0.82% 3 | 0.88% 5 | -0.13% 1 | -0.40% 2 | 0.47% 3 | 1.64% |
| 1979-3 | 0.07% 1 | 0.11% 3 | 0.17% 4 | -0.11% 5 | 0.09% 1 | 0.33% |
| 1983-3 | -0.03% 5 | 0.94% 2 | 0.35% 3 | -0.29% 4 | 0.04% 5 | 1.02% |
| Avg | 0.18% | 0.60% | 0.26% | -0.25% | 0.30% | 1.09% |
| 1987-3 | -0.45% 4 | -2.56% 1 | -0.40% 2 | 1.34% 3 | -0.31% 4 | -2.39% |
| 1991-3 | 0.63% 2 | 1.38% 4 | 0.40% 5 | 2.14% 1 | 0.47% 2 | 5.02% |
| 1995-3 | 0.24% 5 | 0.38% 2 | 0.04% 3 | -0.07% 4 | 0.29% 5 | 0.89% |
| 1999-3 | -0.09% 1 | 0.04% 2 | 0.40% 3 | 0.07% 4 | 0.33% 5 | 0.75% |
| 2003-3 | -0.18% 3 | 0.17% 5 | 1.24% 1 | 0.01% 2 | 0.21% 3 | 1.45% |
| Avg | 0.03% | -0.12% | 0.34% | 0.70% | 0.20% | 1.14% |
| SPX summary for Presidential Year 3 1931 - 2003 | ||||||
| Averages | -0.01% | -0.06% | 0.31% | 0.56% | 0.33% | 1.13% |
| % Winners | 53% | 58% | 68% | 63% | 89% | 95% |
| MDD 12/29/1987 3.39% -- 12/28/1931 2.51% -- 12/29/1947 1.38% | ||||||
| SPX summary for all years 1928 - 2006 | ||||||
| Averages | 0.00% | 0.13% | 0.35% | 0.47% | 0.20% | 1.11% |
| % Winners | 52% | 61% | 62% | 75% | 66% | 82% |
| MDD 12/28/1937 6.78% -- 12/29/1987 3.39% -- 12/29/1930 2.90% | ||||||
Money supply
Gordon Harms has supplied the following chart of M2.
Mutual Fund
Compliance issues demand that I not mention the mutual fund that I manage by name or symbol in this letter.
To see a current chart of the fund go to: http://finance.yahoo.com/q/bc?s=APHAX&t=6m&l=on&z=m&q=l&c=.
For information about the fund go to: http://www.thealphafunds.com/index.htm. The fund now has service class shares available.
Next year
Next year is the 4th year of the Presidential Cycle.
The charts show an average of all years and an average of the 4th year of the Presidential Cycle. Calculations for the charts assume 21 trading days in a month and are calculated by averaging the return of each of the 1st 11 trading days of the month and each of the last 10. When there have been more than 21 trading days some days in the middle of the month have not been counted. When there have been less than 21 trading days some of the days in the middle of the month have been counted twice. All moves, either way, greater than 2% have been reduced to 2% so they do not distort the patterns.
Since 1888 the Dow Jones Industrial Average (DJIA) has been up 70% of the time during the 4th year of the Presidential Cycle with an average gain of 8.3%. Over all years it has been up 64% of the time with an average gain of 7.3%.
Since 1928 SPX has been up 75% of the time during the 4th year of the Presidential Cycle with an average gain of 9.0%. Over all years it has been up 67% of the time with an average gain of 7.7%.
Since 1963 OTC has been up 82% of the time during the 4th year of the Presidential Cycle with an average gain of 12.0%. Over all years it has been up 72% of the time with an average gain of 13.7%.
Since 1979 the R2K has been up 71% of the time during the 4th year of the Presidential Cycle with an average gain of 12.9%. Over all years it has been up 74% of the time with an average gain of 13.0%.
You can get more information about the Presidential Cycle at: http://alphaim.net/research/Pres_Cycle/index.html.
Conclusion
Next week has historically been one of the strongest of the year.
I expect the major indices to be higher on Friday December 28 than they were on Friday December 21.
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