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General Market Commentary
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General Precious Metals
James Dines: What the Rest of December Has In Store
Publisher's Note: James Dines has been a student of the markets for well over half a century. Today, he draws on that experience to explain how the market normally behaves in December going into the new year in an excerpt from The Dines Letter.
We're coming up on a strong buy signal in gold and precious metal stocks. Read on for the details.
Nick Hodge
Founder & President, Outsider Club
"He that hath borrowed must pay again with shame or loss."
English proverb
1) Dow-Jones Industrials: Checking all Decembers since 1950, our Research Department calculated that the Dow had risen 48 times and declined 21, for a bullish track record of 70%, ranking as the top month with the most risers. December is likewise the best month on record in the S&P 500, up 74% of the time in the same period.
TDL’s overall impression of Decembers is one of churning neutrality, perhaps because of the buffeting cross-currents created by tax-motivated buying and selling, or Holiday pixilation.
There often tends to be a rally Top in November, followed by early-December weakness and then a late-December rally, for net-neutral action. So far this December that is exactly what we are seeing.
While the number of advancing Decembers is 2.3 times the number of retreaters for the Dow, extreme movements have been rare. Since 1950 there have been only ten Decembers with rises exceeding 5%: 1956, 1970, 1971, 1976, 1985, 1987, 1991, 1999, 2003 and 2010 (around one out of seven Decembers).
December declines have averaged 1.8%, with December 2002 and 2018 having been the only years since 1980 with a decline in excess of 1.8%.
Decembers "Modulate," as we at TDL call such transitions, in preparation for the important changes due at the start of every new year.
2) A short and sweet rally for traders, popularly known as the "Santa Claus Rally," has been observed in the S&P 500 during the final five trading days of the year, plus the first two in January (this year from December 24, 2019 until January 3, 2020).
The average for that rally for the past 50 years was 1.3%, as of Jan 2019. While the extent of the rallies in the last 3 years has been modest, 0.4%, 1.1%, and 1.5% respectively, it gave momentum to multiple new all-time highs in most stock indices in the succeeding months from 2017 through 2019.
As in any seasonality labeled "Rally," losses in this seven-day stretch are rare, only five times in the last 25 years, and each occurrence was particularly ominous, as described next.
The first one, in the year 2000, a 4% loss, ushered in the dot-com bust.
The second one in 2005, a year dominated by terrorism (London bombings), and natural disasters (Hurricane Katrina) in the headlines, preceded a down year for the DJI.
The third one, in 2008, coincided with the so-called “Great Recession.”
The fourth one, ending January 3, 2015, highlighted by Greece's default and declines in the Euro and crude oil, also led to a down year, an unexpected occurrence within an ongoing bull market for both the DJI and the S&P 500.
The fifth and the most recent one this year preceded the most volatile period yet in this aging bull market, punctuated with DJI declines in the magnitude of 2,004, 2,058, and 1,564 points to the lows on June 3, August 15, and October 3 this year.
If Santa Claus fails again to deliver a rally, it seems that the emerging story line instead becomes the possibility of a significant setback given this record of market declines.
3) Since 1945 we have been calculating year-end rallies beginning with the low DJI close in November or December, and ending with the high DJI close in December or January. As of 2018, the 73-year average had not varied much, at 9.9%.
Thus, assuming that the November 1, 2019 low at 27,143 holds, a projected rally toward around the 29,830 area is indicated by January 31, 2020. This Seasonality will be tested this year as prevailing conditions show pervasive flatness and "Internal Deterioration" in the market.
4) For investors expecting direction in wider quarterly periods, historical records show fourth quarters are the most profitable quarter, with gains for the Dow in 71 out of 98 years, or 72% of the time, as against 60% of the time for the other three quarters combined.
The fourth-quarter gains averaged 2.8%, as compared with 1.6%, 1.7%, and 1.3% for the first three quarters. For the S&P 500, fourth-quarter gains have averaged an impressive 3.9% over the past 39 years, up 79% of the time (31 up, 8 down). If the S&P 500 did rise by 3.9% this quarter, it would theoretically be around 3,093 by the end of 2019.
During the same period, the DJI also averaged an identical 3.9% quarterly rise, up 82% of the time (32 up, 7 down). This projects the DJI at 27,967 for the end of 2019. Those are the cold statistical percentages to play, all other things being equal — which they never are.