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01/02/2006
Bear Corner: 'Hold the Bubbly'

That was the thought fizzling through the world as the market declined from 1276 to 1255 last week (Dec. 23-30) and December ended down one-third of a percent for the month. As the chronic pessimist -- bearish in print continuously since Dow 800 circa 1966 -- put it: "The markets, shaken in the final days of '05 by premonitions of woe induced by the coming of the infamous inversion of the yield curve..." thereby increasing his normal bearishness to fever pitch. He indulged in a bit of slapping himself on the back:  "Our friends, all two of them, warned us we'd be sorry if we insisted on continuing to be bearish. We continued to be bearish and look what happened... a stock market crash, recession, 9/11, and Iraq.... Boy, are we sorry!"

But, but, but. The last big decline we had in December was the -6% in 2002, and the market went up 25% in 2003.  Conversely , the last big rise we had in December was the 5% rise in '99 and the market fell 17% in 2000. Perhaps a bad December is not as bad as the chronics would have it. Indeed, perhaps it sets them and their fellow travelers up with uncertainty and doubt, and leads on average to good tidings in the next periods.

Let's do something that's completely alien to mumboists and cultists: a little counting with pencil and paper. A good start is to look at every December S&P close from 1949 to the present and look at the relations between December moves and subsequent changes. One notes immediately that December is a bullish month. Indeed, the number of declines for December by decade is:

       # of Dec
Decade Declines
1950s     2
1960s     3
1970s     2
1980s     4
1990s     1
2000s     1

The average change is 2.2%, with a mere 13 declines out of 57, a 22% batting average. This is 4 standard errors away from a 50% expectation and 2.5 standard errors away from a 40% expectation.

A stem-and-leaf of the moves shows a nice clustering around +4% and 5% with an avoidance of 3%, with two rises of 11% and the largest decline of the last 56 years, -6%, in 2002.

Stem and Leaf of Dec Moves (%)
-10
 -0  0 0 0 1 1 2 2 2 3 3 3 4 6
 +0  1 1 1 1 1 1 2 2 2 2 2 2 2 2 3 4 4 4 4 5 5 5 5 5 5 5 5 5 6 6 6 6 7 
+10  1 1

An enumeration of the 13 declines shows a tendency for bad Decembers to be followed by rises:

            Next  Next  
     Dec%   Jan%  Year%
1955   -0     -4      2
1957   -4      4     38
1966   -0      8     22
1968   -4     -1    -11
1969   -2     -7      0
1974   -2     12     32
1975   -1     12     19
1980   -3     -5    -11
1981   -3     -2     15
1983   -1     -1      2
1986   -3     13      2
1996   -2      6     31
2002   -6     -3     25
Average     +2.5  +12.8

Thus, the average move in January following these dismal Decembers is +2.5%, with a range of -7 to three moves in the 12%-13% up area.

Similarly, we note two bad years of -11%, one in 1969 after a December decline of -4% and another in 1981 following a December decline of -3%. These are counterbalanced by the five rises of 20% and above.

In short, the dismal performance in December, which is sure to be crowed over by the bears, is quite bullish from a seasonal standpoint. But please, no one remind me that I don't believe in seasonals!

Yale Hirsch replies:

Shouldn't Decembers be analyzed differently from other months, rather than counting?

            Next  Next  
     Dec%   Jan%  Year%   Comment
1955   -0     -4      2   Lost only a smidgen
1957   -4      4     38   End of bear (dumping losses)
1966   -0      8     22   Lost only a smidgen 
1968   -4     -1    -11   Preceded bear
1969   -2     -7      0   Continued bear
1974   -2     12     32   End of bear (dumping losses)
1975   -1     12     19
1980   -3     -5    -11   Preceded bear
1981   -3     -2     15   Preceded continuing bear
1983   -1     -1      2   Preceded losing year till December
1986   -3     13      2   Preceded 1987 Crash 
1996   -2      6     31   Profit taking in last two days of month
2002   -6     -3     25   Anticipation of Iraq invasion

1/3/2006
Ode to a Rally, by Jim Sogi

Sometimes it's best to do  nothing
and allow the trade to go
up to the higher prices,
where they were a week ago,
then sit there enjoy the profits
with your hands beneath your seat
to keep you from getting in the way
and  turning vict'ry into defeat
Icarus was not afraid to fly too high
but he ended up quite low
Remember to count the numbers
on Desolation Row

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