YEAR END RALLY?

Is there really a Santa Claus Rally?

Above is a daily S & P 500 chart with the seasonal tendency displayed at the bottom. As you can see there is a definite seasonal up tendency from Mid October through the end of the year. We have followed this road map remarkably closely this year. Keep in mind that seasonals are just averages of values on these days, so they show us direction but not magnitude. Notice the one large red bar down. This indicates on the 23rd a high probability of a down day just for that day. It does not mean a large magnitude decline, just a high probability of a down close that day. Other than that there is really nothing on the radar here until January.

You can see via the red arrows the very short term trade I made shorting this market last week that I posted here live when I did it. My judgement going in was this was a quickie but would give it a chance just in case we caught "them" asleep at the wheel and it got away from them. Once Friday started rallying off the lows I judged the brief decline was over, so I took profits quickly. This morning has certainly verified that was a wise decision. I trade mostly mechanically but sometimes you have to think about what you are doing. This has been a very strong market, so shorts need to be on a very short leash.

You can see in January that from a seasonal perspective, we could have some trouble. We know from history that major highs have had a tendency to be made in years ending in 9 or 0, and next year is 2010. Does this mean we just go out and sell the minute January comes along? Not exactly. We have to view what is going on within the context of where we find ourselves here. We have had a major rally this year, and many fund managers are here at bonus time. We also have Uncle Sam both through just massive injections of liquidity into the economy in general, and selective futures buy programs, moving this thing along. There are major political events going on so make no mistake about it, the herd has every incentive to keep this propped up here.

There is going to have to be some type of catalyst to throw this off stride. I had suspected the dollar rally might do it, but it has not. Historically that would be good for stocks anyway, but in this bass ackwards world we live in now, the dollar and stocks had been trading in reverse fashion from one another. Even a commodities selloff which appears to have begun has not had much impact. We have banks vanishing like a Star Trek red crew member, that seems to be no problem. Of course, that is being kept under the radar as much as possible. What it is going to require is something like that Dubai situation, a very large default of some type. We know there are literally countless scenarios where this "could" happen. However, the government interventions are preventing them. It will have to be something too big for that, and the one albatross I see out there that could cause this is the collapse of CMBS. This is not a new story, it has been out there for a long time. However, it does seem that they cannot kick this can down the road forever. We are talking large enough dollars there, that the FED cannot handle that all at once, or even over a period of time.

Another outside chance of a catalyst is a collapse of the GOLD market. Once again this in a normal world would not have this type of impact. However, this is one place people have been able to go to and make alot of money, another bubble that has been inflated. If for some reason this were to deflate, and people collectively would feel they have once again been fleeced, it could change sentiment enough to have a broader negative effect. If this were the event, it would be accompanied by a rising US Dollar which in reality at this point would cause alot of problems for our governments plans to inflate their way out of the spending spree they are on. They are likely already concerned about this recent dollar strength behind closed doors.

The last and most obvious one is the passage of this massive socialization of medicine. Following this story is almost like watching a movie that you are thankful you are not in. The financial impact of this is going to be devastating eventually. Maybe once the the groups get together and the public realizes it is actually going to happen, it will cause some problems for the markets.

These are just broad thoughts of some possibilities, I really have no idea which if any of these will happen. I think the CMBS scenario is the most likely, and I think we will start seeing some type of change in things as soon as mid January. Until then it should be smooth quiet sailing flat to up for the balance of the year in stocks.