Deal or No Deal? A Contrarian's Guide to the 'Cliff' Trade

The technical levels we're watching as stocks march into December

by 12/1/2012 10:22:41 AM
Stocks quoted in this article:
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Indicator of the Week: December Seasonality
By Rocky White, Senior Quantitative Analyst

Foreword: Anyone looking for reasons to buy can add "seasonality" to their list. December has been the strongest month over the past 30 years, averaging a 1.95% return. It also boasts the highest percentage of positive returns, at 80%. There hasn't been a negative December since 2007. The table below shows how December stacks up against the other months of the year. This week, let's break down those 30 returns a little further, depending upon investor sentiment and where the market stood year-to-date heading into the final month.

SPX Returns by Month Over the Past 30 Years

Investors Intelligence Poll: As contrarians, we believe negative expectations among investors lead to a stronger market. The very fact that investors are pessimistic means they've already priced in a lot of bad news. Also, the negativity suggests a lot of investors may have sold their positions and moved to less risky assets than stocks. This means there's a lot of buying power that could be unleashed when those investors get back in the market. Once things turn around or something changes for the better, their collective dash into the market creates an excellent buying opportunity.

One way we gauge investor sentiment is by looking at a weekly survey conducted by Investors Intelligence. I broke those 30 December returns down depending upon the percentage of investors who were bullish on the market, as measured by that poll. The most recent survey showed the percentage bullish to be 39.3%. Looking over the past 30 years, there were eight times the percentage was less than 40%. All eight times led to a positive December, averaging a gain of 3.28%.

SPX December Returns with II Poll Results

Depending on YTD Return: The S&P 500 Index (SPX) is up 12.61% so far this year, with a month of trading left to go. So, I broke down the last 30 Decembers depending upon how the market was doing before the final month of the year. The table below summarizes those returns. In half of the past 30 years, the market was up at least 10% heading into December. The market typically continues higher in those cases. On average, it gains an additional 2.52%, and it has been positive 80% of the time.

If the market is down year-to-date going into December, the final month has been positive eight of nine times -- but one big negative December in 2002 (-6%) and a lot of small wins (four of the eight positive returns amounted to less than 1%) have led to an average gain of just 1.11%, which is the lowest of the three rows. Based on this table, I'd say we're right where we want to be heading into December.

SPX YTD and December Returns

This Week's Key Events: All Eyes on November Payrolls
Schaeffer's Editorial Staff

Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

  • The week's slate of economic data kicks off Monday with construction spending, auto sales, and the ISM manufacturing index. Quarterly earnings are expected from Casella Waste Systems (CWST), Conn's (CONN), LDK Solar (LDK), and Pep Boys (PBY).

Tuesday

  • There are no major economic reports scheduled for Tuesday. The earnings calendar starts to heat up, though, with results due out from AeroVironment (AVAV), AutoZone (AZO), Big Lots (BIG), Pandora Media (P), Toll Brothers (TOL), and Vail Resorts (MTN).

Wednesday

  • Jobs data starts to roll in on Wednesday, with the release of ADP's private-sector payrolls report. Also on tap are factory orders, the ISM services index, and the third-quarter productivity revision. Finisar (FNSR), Men's Wearhouse (MW), SAIC (SAI), and Vera Bradley (VRA) are set to announce their quarterly earnings.

Thursday

  • Weekly jobless claims are due out Thursday, along with the Challenger, Gray & Christmas report on planned layoffs. On the earnings front, we'll hear from Analogic (ALOG), Cooper Companies (COO), H&R Block (HRB), Lululemon Athletica (LULU), Smith & Wesson (SWHC), Smithfield Foods (SFD), and Titan Machinery (TITN).

Friday

  • The week concludes on Friday with the closely watched nonfarm payrolls report for November and the Thomson Reuters/University of Michigan consumer sentiment index for early December. There are no major earnings reports on the calendar.

And now a sector of note...

Gold
Bullish

We continue to view gold as an appealing bullish play, as investors and speculators seek opportunities outside of traditional equities. However, after a rough week for the SPDR Gold Trust (GLD), we're now eyeing a few significant support levels to confirm our case. Last week, we discussed GLD's bounce from its 80-day moving average; this week, we're keeping our sights set on the fund's 140-day and 320-day moving averages. The 140-day has played a significant role since the 2009 bottom, while the 320-day has come into play more recently, having acted as both resistance and support so far in 2012. If these key levels are broken to the downside, we'd have to rethink our bullish stance. Additionally, it's worth noting that a trendline connecting major GLD lows since 2009 is currently located around $165, not far from the fund's Friday close at $166.05. While December seasonality is historically mixed for gold, December 2011 saw a 10% decline, so a GLD put hedge could be a worthwhile play in the event we see a repeat of this price action. In the meantime, one sentiment survey we follow suggests traders are not nearly as optimistic now as they were at the time of gold's 2011 peak, which -- along with the presence of historical trendline support -- leads us to believe a near-term bounce might be in the cards.

Daily Chart of GLD since November 2008 With 140-Day and 320-Day Moving Averages

Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.

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