As one who remains bullish on the near-term outlook, I have to welcome the little sell-off we've seen so far. I think that it boosts the odds of a year-end rally, rather than lowering them. The DAX in particular was looking overbought. Its relative strength index was above 80 per cent. That has been cut back to around neutral.
FTSE's festive record
Put simply, this is preparing the way for a later sleigh-ride. The Santa Claus rally in my understanding is a phenomenon belonging to the 52th trading week of the year. (And also to the 53rd in certain years where there is one.) The FTSE 100, for example, has produced an average return of 1.2 per cent in the 52nd week over the past 30 years. The index has risen 24 times out of 30.
By contrast, the 50th week - the week ending 13 December - is far more Scrooge than Santa. The index has gone up in only 13 weeks out of 30. The average return is pretty much flat. I don't know where this leaves the theory that we should go long in order to "get in early". It doesn't seem to me as if the rally has started earlier each year.
The other thing to bear in mind is that the FTSE 100 is looking pretty sorry right now, as it was even before the latest sell-off. Might it not close the gap that has opened up between it and Wall Street or the DAX? Well, possibly. But catch-up trades have never gone well for me. I'd sooner buy the present, stronger trend rather than betting on a weakling to become a he-man. That means buying the S&P or DAX.
If I were going to speculate on a turnaround, however, it wouldn't be in the FTSE 100. History suggests the FTSE 250 could be an even better bet. Since its creation, it has gone up in the 52nd week 25 times out of 27. The average gain has been 1.27 per cent. Right now, though, it is in a bit of a fix. Already in a swing chart downtrend since 5 November, it gave a repeat sell signal on Monday 2 December.
FTSE 250's end-of-year record
To my eyes, the current sell-off in the FTSE 250 looks very much like its last two shakeouts, in August and September-October. Both were pretty nasty at the time, but gave way to a renewed burst to fresh bull-market highs. I fancy that the same will happen this time round. Another up move of 700 points or more could be in the offing.
Aside from the swing chart downtrend in force, the other drawback is the cost of trading the FTSE 250. Spread betting firms generally charge a 30-point spread to trade this index. The feeling of going offside by this amount when you open a trade isn't a nice one. This isn't the case with the S&P or the DAX, both of which have better charts. So, while I'm bullish on the FTSE 250, I'll follow the leaders if and when Santa comes.