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| The December Lows are the Most Important Numbers to Watch Right Now... By D.R. Barton, Jr.
You know that I use well-reasoned and statistically significant seasonal tendencies as one of my guides for market expectations. Last week we revisited the Santa Claus Rally, which shows an upward bias for the period that covers the last 5 days of the trading year plus the first two trading days of the new year.
And Santa came through again this year.
From the close of December 21, 2018 to the close of January 3, 2019, the S&P 500 gained 1.3%, even with the big down days on the first and last days of the period:
On Christmas Day, I sent you an article where I debunked the myth Called the First Five Days of January. That indicator is useless (though you'll hear a lot about it in the next few days...). Toward the end of the month I'll debunk another indicator called the January Barometer. It says that as January goes, so goes the year. But I'll show why you shouldn't pay any attention to that one either.
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But here's a study that is useful and particularly important this year. I've told you in our video market updates how important the lows made on December 24th and December 26th are as support under the market. Here's just one of the reasons why...
A Better Way to Look at Market Activity Early in the Year
With the knowledge that the "First Five Days of January" and the "January Barometer" indicators are worthless, here's a calendar predictor that IS useful - The "December Low Indicator". Apparently, 1970's Wall Street analyst and Forbes contributor Lucien Hooper had similar misgivings about the "First Five Days" indicator, or using the whole month of January as a bellwether for the year's stock price activity.
According to the Stock Trader's Almanac, "Hooper dismissed the importance of January, and January's first week, as reliable indicators. He noted that the trend could be random, or even manipulated, during a holiday-shortened week. Instead, said Hooper, "Pay much more attention to the December low. If that low is violated during the first quarter of the New Year, watch out!"
Hooper's indicator seems to me to have much more merit. First of all, it is based on sound market and behavioral patterns. End of the year tax selling often drives prices to temporary lows in December; the beginning of the year re-investment cycle then should provide a lift for stock prices that should last through the first quarter if the market conditions are healthy. If this follow-through doesn't occur, then it's a good indication that the market will continue to struggle.
The indicator has shown that, of the 38 times (since 1952) that the Dow December low has been eclipsed in the first quarter of the following year, the market has gone on to make significant new lows (though last year was an exception - the market only went -1.4% lower after closing below December's low).
And major new lows were made only three times when the December low was not breached in the first quarter - in 1974, 1981 and 1987; all years that had significant market trauma.
So the lows from last week really will be a key support level to keep our eye on.
With the strong up morning on Friday (1/5) those lows are 6.7% below us now. But with this volatile market and almost three months of time for this December Low indicator to play out, this support area will be a key are for us. We'll maintain short-term sideways to up expectations as long as that level holds.
Great trading and God bless you,
 D.R. Barton, Jr.
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