This is supposed to be a positive time of the year for the stock market -- the so-called "Santa Claus Rally" period. Typically, the market advances about 1% during the last five trading days of one year and the first two of the next. But If this seasonal period ends with a loss, that is generally negative for the broad stock market. As the creator of this system, Yale Hirsch, said: "If Santa Claus should fail to call, bears may come to Broad and Wall." Classic!
Stocks continue to struggle after $SPX broke down through the 3900 support level a week ago. The end of the trading year typically brings with it a short-term rally, classified as the "Santa Claus Rally" by the late Yale Hirsch.
The CBOE’s Volatility Index ($VIX) gets a lot of attention from both technical analysts and the media. That was the case this week, as $VIX spiked higher – rising to 25.84 intraday on December 13th, before reversing sharply downward after the CPI number was released. It closed that day at 22.55, more than 3.00 points below its high, and that generated a $VIX “spike peak” buy signal, by our definition.
When $SPX rallied strongly after December CPI figures were released this past Tuesday (December 13th), it ran out of gas almost exactly at 4100 -- the resistance level from early December, and right about in line with the downtrend of this bear market. Sellers emerged at that point and not only thwarted the rally but pushed $SPX down so hard that it broke major support at 3900. The latter move came after the FOMC not only raised rates (again) but also made some hawkish statements about continuing to raise rates.
Stocks ran into some severe resistance at the end of last week, when the rally that began in early October ran into the downtrend line of this bear market. Also, the rally peaked out after briefly climbing above the still-declining 200-day Moving Average of $SPX. So far, the bears have won the battle, and there was some rather heavy selling in the early part of this week. This has put the bulls on notice: hold the line at support at 3900, or expect another bad December.
This article was originally published in The Option Strategist Newsletter Volume 17, No. 15 on August 15, 2008.
Trading or investing involves several facets of operation: trade analysis, money management (including trade execution and position size), and follow-up action (including exiting the trade). Most successful and experienced traders agree that trade analysis is the least important – contrary to what a novice would expect. In fact, I have seen a successful system trader state that he could turn any reasonable system into a profit through proper money management (i.e., through proper position sizing and follow-up action).
If one is too conservative, he can ruin a successful system (by stopping himself out at the tiniest hint of a loss, for example). On the other hand, if one is too aggressive – say, leveraging position size up too aggressively when profits exist, he will also fail because one small downturn will eventually be a disastrous loss.