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Beware of December bearing gifts

Created:

2 December 2008

Written by:

Marc Rivalland

It is said that stock market prices almost always rise in December. Because of the approach of the Iraq war, 2002 is written off as an aberration. But if you analyse the charts, that vaunted seasonal tendency is due almost entirely to the low-volume "Santa Claus" rally, which occurs during the last five trading days of the year. The first half of December has a rather mixed record.

From a chartist's point of view, the interesting thing about December is that any attempt to start a downtrend fails, and attempts to continue a downtrend also fail. There are not many examples of December starting off with a downtrend prevailing. December 1994 looks relevant. Right out of the blue, the downtrend in early December 1994 ended and a substantial, unheralded rally took place.

The issue now is whether the lows for 2008 were recorded on 20 November on the US indices, or whether new lows will be recorded in the next week or so. The bearish case is supported by the US swing-charts which executed perfect mini-corrections, up to the 20-day moving average, then gave repeat sell-signals on Monday 1 December and dutifully collapsed. The ordinary course of events would be for new lows to be made.

However, the McClellan summation index turned up on 25 November. I know the last upturn from this indicator on 29 October was a bad signal. And just as one cannot rule out the sort of double-dip in the indicator which happened after 5 November, one can also not rule out a triple-dip. But the message from the summation index fits with the seasonal pattern of December. And although the sell-off following the swing chart sell signals on 1 December was substantial, volume was no more than average, indeed in the technology sector it was low.

Most of the signature stocks I look at like Dell, Ebay, Google, and Amazon have had straightforward mini-corrections followed by repeat sell-signals, which in no way suggest a change of trend. The same is true of HSBC, WPP, and a host of UK shares. In order to have change of trend, they need to sell off for at least three days then turn around and rally through the putative swing high of 28 November.

The real problem for the markets is the chart of the Nasdaq relative to the Dow. The Dow has fallen 24 per cent since 14 August, but Nasdaq has been even worse, underperforming the Dow by 36 per cent over the same period. And even during last week's huge US rally - the largest 4 day gain in history - the Nasdaq continued to underperform. The Nasdaq is the vehicle for the hot money which is being withdrawn from the market. I believe the chart below is a fuzzy proxy for the risk premium. When the Nasdaq outperforms the Dow investors are signalling that they are willing to take on more risk. Now they are the signalling the opposite.

I don't know that it matters terribly whether the market falls a bit further but stops short of the lows of 20 November or whether it actually exceeds those lows. In either event, a rally in the second half of December is likely. I'm hoping the markets finish up a little way above their 50-day moving averages by the end of December which will set up another great shorting opportunity some time in January.