Get Ready For the Santa Rally!

We are in the seasonal strong period (from Nov to Feb) where the Dow usually rings in a Santa Rally. In the short run the week after Thanksgiving tends to be down, but the week after kicks off the Santa Rally. We have also been in an odd-looking market for the past month, where it looks like a series of square waves. See the first chart, excerpted from Daneric today.

My speculation is the odd shape is from a very clever arb play on the Dollar. Throughout November we have seen overnight selling of the USD Sunday, and a sharp spike up in equities Monday; then a fade through the rest of the week. Given Thanksgiving and Dubai, the pattern reversed into a sharp overnight drop in equities; but the pattern returned on the last day of the month, with overnight dumping of the Dollar on Monday night and a sharp rise to greet the new month.

Why this play? A number of Asian Tigers publicly announced that they would intervene to debase their currency (or at least stop it rising so fast against the USD) in order to remain price competitive with China. China stayed out, Japan is tapped out, and the US stayed mum. If you were George Soros, who had called a bluff of the Bank of England and won, what would you do? Sell into them, let them drive it back up, and do it again! In the meantime hedge via buying into US equities. I cannot confirm the play, but it is pretty clever.

Wave Theory can encompass even an odd set of square waves. The simplest count is that we are going through and are about to finish a triangle, meaning it is either a wave 4 or a B wave. Both denote a wave up. We need to finish off the triangle, so expect weakness through the rest of this week. 

This also means Prechter will have to cover his double short position presently. 

This chart is from today's STU, and is one of two counts they are following. There is a lot more in tonight's newsletter that I will leave for subscribers. Suffice to say that we at least have a final wave 5 up to finish, which could happen by the end of the year, or earlier, even close to Jim Ross's Dec 10 turn window, which stretches to Dec 15.

The more interesting count, which fits the seasonal strong period, is that we have a much longer wave stretching into Feb 2010 and striving for the 61% retrace. This chart shows that count: we have had a double zigzag up so far since Mar9, and are in the B wave of a third zigzag. The good news is that there are no quad zigzags, so this next wave is it. 

So there you have it: a Santa Rally either way! And if I am even half right about the USD Arb Play, we should be downish this week then have another overnight Dollar Dump Sunday night, setting up a rip roarin' kick-off to the Santa Rally next Monday. 

Comments

[jeff]

I have Monday, Dec 21st, as the Day that the "Great Crap Rally of 2009" enters the History Books.

And, no, its not because of the Solstice, Fibos, or Elliot Waves.

Furthermore, 2009 has been the year of "HOPE".

And 2010 will be the year of "CHANGE"

Just like the Obama Campaign Slogan said.

[ron12paul]

so i guess he has gold to the moon now?

[DG]

I don't think you can look at seasonal tendencies out of context, though. How strong is the "Santa Rally" tendency following a 60%+ move over the prior 8 months?

This whole move since March has been a "Santa Rally"!

At this point, I'm not even sure why they bother to open the exchanges. Just give everyone free money.

[Roger D.]

The percentage of Bears hit 16.5 tonight and the Bull/Bear Ratio is once again over 3.00 this historically is rarified air
only seen in 1987,2000,2007.Would you like to comment on this Yelnick.
I can see a large rectangle in the SP and 5 point patterns in other averages. Wild swings usually point to distribution , not accumulation.That said everybody worldwide is expecting a Santa RALLY....EVEN YOU.All the Bears on the blogs have turned bullish.....this means T for Top.

[joe]

"Wild swings usually point to distribution , not accumulation."

Well said Roger.

I smell the top too.

Yelnik - maybe Santa is bringing a lump of coal this year - for all the bad little boys on Wall Street.

Joe

[Howard Bernstein]

Roger D.
Where are you getting your sentiment data? AAII reported 41% bulls and 33% bears yesterday which is still not frothy enough to call a top. Last week in this survey the bulls and bears were equal.

[vipul garg]

why are we (meaning traders) interested in picking a top ?
almost no one picks a top or a bottom ,wave practitioners not withstanding.

obviously some us will be right if we keeping saying top at every new high, but thats not the 'trading' right.

let there be a top and then let us evaluate and trade it accordingly.

[Bird]

Good point vipul garg. Are you buying the apparent corrective formations on the way up?

[Gorham Loe]

Vipul garg wrote "let there be a top and then let us evaluate and trade it accordingly."

Please define "top."

[Wave Rust]

It's just a little intraday 4 ... again.

Virginia Jim's dates are interesting but if a December 10th arrives as a low - then buy it. If it's a high sell it for a few days or maybe a few weeks - but not a crash back to and below the March lows... maybe the July lows, but I'm more doubtful of that as time passes and markets rise.

Somebody stated that the market is overbought. I don't see it on daily or weekly. I see the divergences but they have been worked off rapidly with minor down moves. Now, January 2004 was very overbought, but it still took over 2 months to turn down.

Ask yourself, will I be bearish at spx 1150? at 1200? at 1250?

At worst, the current count is rising in an A wave correction, with more up to come. The likely correct count is much more bullish. Much! As in, pulsive. As in, a bull market. Like a big beautiful and confusing wave 1 (pick your favorite degree!)

Two things- 1. Remember that ewave is a structural plan and does not dictate. It accommodates.

2. The Fed has a virtually infinitessimal amount of money. Don't fight the Fed. Ever.

I trade intraday and daily timeframes.

I trade what I see, and I don't see near term overbought, just divergences for quick pullbacks within a trading range of higher highs and higher lows.

I'll get short term bearish when the SPX makes a lower daily low and close, than the recent troughs. First warning will be when the rising trendline oonnecting the lows since July is broken significantly, just under Dow 10,000 now.

SPX 1125-50 could turn the index sideways-to-down into mid-February - frustrating the bears. That will be a trading feast.

Watch for a run back to the gaps on Dow and SPX in early November. Should be a nice swing.

Merry Christmas

wave rust

[DG]

2. The Fed has a virtually infinitessimal amount of money. Don't fight the Fed. Ever.

Can someone please explain to me how the markets have ever gone down for an extended period of time since 1913 and the creation of the Fed, then? Did they fall asleep? Do we need to install better coffeemakers in the Fed's buildings? I heard "don't fight the Fed" all the way down off the 2000 and the 2007 highs, didn't you?

If the Fed goes full-on Zimbabwe and prints an infinitesimal amount of money, I doubt the stock market is going to be the locus of choice for it. We already see gold moving up more than the market does on days when they're both up, indicating that inflation expectations aren't driving earnings increase expectations so much as they are driving fiat currency revulsion. I think people are getting a little bit carried away by this "the dollar's going to zero and the S&P is going to a bajillion" idea.

[vipul garg]

Gorham Loe : the 'top' is the point from which there will be atleast 20% decline in the current context.

Bird: i am just trying to get my hands on whatever spx gives me long or short.i have traded both on long and short side though long trades have been more.

[Wave Rust]

DG- "I heard "don't fight the Fed" all the way down off the 2000 and the 2007 highs, didn't you?"

exactly my point. don't fight them when they are printing or when they ain't.

2000 to 2002 was an ''ain't'' period. greenspan idiocy

2007 began a correction, until it wasn't. It began in February 2007. Then in the summer of 2008, the Fed tried to play catch up too late. And then in September, the geniuses in congress took their time stepping up to the plate. Within days, the markets crashed.

The decline wasn't finished until March 2009, but the crash ended in October.

Now we have unflation as opposed to deflation. A flushing of marginal businesses. An uncreating of jobs. The new major growth industry in the US is the "how to survive economic destruction by Obama socialism". The solution is to join the Chicago mob style of competing.

But that isn't going to affect markets until Dodd and Frank take over the Fed.

So maybe the rule should be, don't be bearish after a crash when the Fed starts printing, and, don't be bullish when the Fed sees the next "flation" and stops printing as much.

As for "earnings increase expectations" versus "fiat currency revulsion", I will eat much better using a repulsive fiat currency to buy my food than carving off a chunk of 'yellow mellow' while chatting up earnings expectations with the grocery store cashier.

The dollar may not be worth as much as it used to be, but it still works. Where did the world's central banks go for liquidity reserves last fall? btw, 90 T-bill rate looks like a double bottom. :)

DG, do you think a Fed that buys up excess at its own auctions, through surrogates, is going to let the markets crash again? I sure don't.

And the dollar crashing is not necessary to run the markets up after the crash is forgotten. A trading range for the dollar will work just fine.

Markets may not get to new highs for another couple of years (after we get a new administration). But new all time highs are just a matter of time.

wave rust

[Bob M]

Sorry but my English tutor background forces me to do this.

Infinitesimal have been used to express the idea of objects so small that there is no way to see them or to measure them.

In common speech, an infinitesimal object is an object which is smaller than any feasible measurement, hence not zero size, but so small that it cannot be distinguished from zero by any available means. Hence, when used as an adjective, "infinitesimal" in the vernacular means "extremely small".

[highmax]

I notice the cumulative ad line is close to the Mar-July 07 top and wonder how long it can remain so wildly elevated..

[Wave Rust]

Bob M
u r rite. yur english tudor background is worthy of praise.
butt u got me drift, dincha.
thanx

wave rust

[norm]

The Fed has a virtually infinitessimal amount of money. Don't fight the Fed. Ever.

I believe he meant "unlimited" amount of money.

[mogey]

Anyone remember TERA_BAAP? He had it right when he said Bernanke and the fed will not let the market drop. Then he changed his stance based on sentiment and hasn't been seen since. Presumably he got his head handed to him. He should have stayed long - this market is fixed and looking for patterns that don't exist isn't going to help you.

[joe]

Yelnik - don't you think it is likely that there will be a push to lock in profits by the end of the year - for at least many fund managers?

Equally - traders that did make profits over this amazing equity run up this year would - maybe more than they usually do - look to sell tax loss positions for the rest of the year?

SO - really, isn't it very possible that this santa rally will turn into a lump of coal here?

Joe

[Roger D.]

Conviction is a terrible thing when your wrong, but by my guess Prechter was right.

Looks like a top to me, Broadening that is. EWT is really meningless unless it matches to reversal patterns when trying to identify a top.

The P/C and bear sentiment are at low low points today. Looks like a 1 down yesterday foolowed by a A up this morning, B crap and then a weak C. Wave 3 down? Sure looked like one.

Cheers

[Wakeupsid]

Yelnick post are best contrarian! How come u not bankrupt?

Oohh you don't trade your mouth!

[joe]

I would just point out that it seems the dollar is breaking up from its range now on the chart from today.

Given that quick sell off on the close on the Dow today - I sure wouldn't want to be long tomorrow morning.

Joe

[joe]

Yelnik -

Maybe you want to do a post about what Hatoyama is saying tonight - looks to me like he is about to kill the Yen. Check the Bloomberg article - I am not sure exactly when he is going to be "unvieling" this - except it is tonight (our time).

Joe

[joe]

Opps - here is the link to the bloomberg article

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNj0EwkOxb3k&pos=5

[yelnick]

Joe, I think fund managers have already been lightening up - I did a post on this with a WSJ graphic in it the Monday before Thanksgiving: http://yelnick.typepad.com/yelnick/2009/11/mutual-fund-monday.html

Retail is driving this, and overseas buyers (hedging a fall in the USD). The Santa Rally is likely to meander up on modest volume.

BTW in case it wasn't clear enough from my post, I expected a drop into the end of this week. It began near the close today. It needs to drop another 150 Dow pts or so to confirm the end of a triangle. So tomorrow should be down. Monday might then be up sharply after overnight selling of the USD.

If the USD has really bottomed, this pattern of Sunday Dumps and Monday Pumps will go away. Joe's more recent comment about the Yen is something I will look into.

[Roger D.]

Here is the data and chart from Investors Intelligence...3:1 is one of 3 lowest readings in 25 years.

Looks to me i'd want to be a seller not a buyer.If it works at bottoms , why not tops .Extreme is just that extreme.

By the way Obama's work conference today was anything but cheerful..just my oberservation for tommorow.

http://evilspeculator.com/wp-content/uploads/2009/12/2009-12-03_ii.png

[joe]

Yelnik - I have heard that too - that fund mangers have already begun to lighten up. But if they have begun to do so - in any meaningful way - where is the volume??

[graspthemarket]

Yelnik,

I actually wrote a little bit about this, though not as extensively as you, on Tuesday this week. I wrote about it in the Bottom Line--which is updated daily http://www.graspthemarket.com/bottomline.php
So the actual text isn't posted anymore. However, I pointed out, "The headline of the day states, “Stocks likely don’t’ need Santa to keep the rally going.”

I commented, "I would rather have the help of Santa if I’m long this market than find a lump of coal in my stocking. In other words, when the market starts to get an attitude of “you can’t hurt me no matter what happens,” it might be a good time to reassess your positions to see if you need to make any adjustments before the crowd makes their adjustments." This is just my contrarian point of view showing through.

Finally, does anyone know where to find the real data of a Santa Rally? For example, how many years out of the number of years has a rally actually occurred (is a Santa Rally more than 50% of the time)? I don’t think I read that information above. Thanks for your help on the numbers.

[dailypundit]

Santa Claus rally:

Santa Claus Rally: 40% of the Dow’s Yearly Gain in a 17-Day Stretch -- Seeking Alpha

[yves]

http://www.zerohedge.com/article/guest-post-yen-proxy-yuan-rmb-devaluation-or-carry-trade-d%C3%A9j%C3%A0-vu

here is my recent thinking on the yen.....

Yves

[Chomen]

Seasonality has been the wrong way to read this market all year. Expecting a Santa Claus rally is a bad bet.

[Chomen]

Seasonality has been the wrong way to read this market all year. Expecting a Santa Claus rally is a bad bet.

[Wave Rust]

Yves,
good piece there. if they try to launch the yuan onto stormy seas, it will hit all of the regions currencies, especially India.

but if Tokyo starts buying US bonds, that would relieve the Fed from buying its own paper. the in flow of Yen to dollars would also likely give real estate a jolt in the US too, but not from lower rates, but from the new hard asset roi play. Alot of money would start dumping gold too.

In the end though, as you say, we would unwind some of those trillions CDO's in the skeleton closet. the CDO's would unwind, assuming that they could be priced.

this all sounds like a springtime kind of deal.

btw, the Yen chart is a lovely abc down from the 98 high. not finished yet though, imo.

wave rust

[Mark@ceo trader]

A Santa rally correlates with the charts on my website. We should have one more thrust up.

[mark]

WaveRust
why you think Indian curruncy will be hit hard.