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Santa Claus Will Fly Stock Markets Higher On This Date...

 

Wall Street wants you to believe in Santa Claus, even if you don't.

 

The famous "Santa Claus rally" which is said to boost stock markets in December is not just a fairy tale. It is an actual market phenomenon that was first discovered in 1972.

 

However, most of the financial media are completely wrong about the date when the "Santa rally" is supposed to happen.

 

For one thing, the performance of stocks in December is historically mediocre and nothing special. On average, the Dow gains 3% in December - which is nothing to sing about.

 

However, there is a specific period in December that does better than any other period during the month.

 

If we look back over 40 years of data, stocks enjoy a temporary rally from the last five trading sessions of December until the first two of January (source: Wall Street Journal).

 

If you were to translate that to this year in 2013, you would be buying stocks from December 23rd and then selling most of them by January 3rd. This is the historically accurate "Santa Claus Rally".

 

Of course, it may turn out differently this year, we don't know. So let's take a look at two important markets I'm watching right now:

 

FTSE 100 (UK Markets)

 

The UK Market's FTSE 100 is on my "buy" watchlist for 3 reasons. See this chart:

 

Firstly, notice that UK stocks are approaching a key support level (shown as the red line). This "trend line" could hold the FTSE at 6400.

Secondly, the pulse which fired short on the FTSE (see red arrow) is now almost coming to an end. Once this pulse finishes I am looking for a reversal signal (see below) to buy the FTSE.

 

Thirdly, as a reversal signal, I want the FTSE to close above its 200 moving average (MA) which is shown as the dashed green line on the chart. Notice that since last year, every time the FTSE closed below its 200 MA, it was a false signal and then it quickly reversed and closed above it again. This could be the confirmation we need to buy.

 

I also like UK stocks right now from a "value" perspective. They are undervalued and relatively cheaper than US stocks.

 

S&P 500

 

The S&P is so far down almost 2% this month in December. See this chart:

 

The S&P could re-test its support at the top of the ascending wedge pattern. So if history repeats, then there could be slightly more downside to come before we see stocks rallying again next week from December 23rd.

 

However, the Fed "FOMC" Meeting this Wednesday could change things depending on what the Fed will say. For example, if stocks do not like what they hear from the Fed (such as a surprise December taper), then they may decline until Monday. On the other hand, a positive signal from the Fed (e.g. no taper) may cause the Santa rally to start earlier than next Monday.

 

Hope it helps. Good trading!

 

P.S. Santa does sometimes a miracles at least theoretical.

Cheers Hermes

Edited by hermes
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  • 2 weeks later...

Pigs Get Fat and Hogs Get Slaughtered...

 

One of the most important lessons I learnt as a trader is that "pigs get fat and hogs get slaughtered". This phrase is meant to warn those who get too greedy at the wrong time...

 

I'll show you in a few moments exactly who the hogs are that are about to get slaughtered by the stock market.

 

But first let's remember where 2013 has taken us.

 

So far we have been right about the Santa Claus rally which we correctly predicted would take the Dow higher by at least 3% in December. We reached our target for the Dow of 16,568 on Tuesday, and we almost touched our 1850 target for the S&P on the same day.

 

Although the market made its move slightly earlier than our target date of 23rd December, we still did better than traders who were wrongly forecasting a pre-Christmas "crash".

 

As I said on the 5th December video declines in the month of December are buying opportunities.

 

However, now is a time to be very cautious about piling into the stock market. And here's why:

 

According to my colleague Jason Geppert's report, mutual fund traders' expectations of a continually rising market has gone parabolic! Take a look at this chart:

Please click "display images" to see this chart

The blue line shows that mutual fund traders are continuing to pour money into stocks at an increasing rate.

 

You see, "Mom and Pop" investors who have been too scared of buying stocks this year are finally getting brave (or dumb) and getting their feet into the stock market. They've already missed the best part of the market action which started in 2009, and now they don't want to miss out any longer.

 

Sadly, "mom and pop" and the mutual fund traders who are getting greedy are a bit too late. They are going to be the hogs that will get slaughtered.

 

If you look again at the above chart, you'll notice that whenever the optimism of fund traders has become extreme, this has always been a warning signal.

 

Previous times when fund trader optimism reached extreme levels was in March 2012, September 2012 and May 2013. Each time afterwards the market had a correction between 6 to 12%.

 

When you have 75% of "dumb money" thinking the market is going to go higher, you know something is not right.

 

Once the Santa Claus rally which usually lasts until the 2nd or 3rd of January is over, I believe we shall see an intermediate top in the stock market.

 

Alessio

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