And so the first month of QE2 is over with interest rates rising a bit and the stock market dropping for the month. However, in all likelihood QE2 will help raise the markets just a little bit more, and seasonals suggest that December will be an upwards month as good news floods in about internet sales and the solution of other worldwide crises.
Cycles analyst Charles Nenner of the Charles Nenner Research Institute had predicted that December would be a short term cycles low in the stock market, but it may be that today’s rally shows the kick-off has started earlier. Nenner also feels that we will see a collapse in equity prices in mid-2011, possibly due to deflationary forces or other reasons, and then eventually DOW 5000. Elliottwave technician Robert Prechter ultimately sees DOW 1000.
We don’t have any crystal balls but do agree that the markets will be testing the 2008-2009 lows next year, with a bottom in either 2012 or 2015.
But what does that mean for trading? Nothing at all using our methods. We pick stocks that have a fundamental story, apply the seasonals on top of them, and then make judicious trades. Let me provide an example to show you what I’m talking about, but first the S&P500 forecast:
Here’s what I mean about stories…
Many macro players are citing the fact that world growth will deplete our resources, and therefore there will be demand for more COAL and NUCLEAR energy. Okay, let’s check the seasonals for PKOL, a global coal ETF and NLR, a nuclear power ETF. We have a fundamental view, we want to get in, but we are worried about the timing. Should we get in now?
Let’s do our research …
Form these two charts, you can see that there is not a lot of past history to build accurate seasonals to go on. With the little data we have, December looks like it could see a continuation of the push upwards, but then there may be a drop in prices come January. If you are a short term trader you have the potential of a December pop, if it’s in your outlook, but for a long term investor you might want to wait and see whether there is a January correction so you can get itno a position (or add to one).
Since we would be long term players here if we are following long term fundamental analysis, we would be looking to get in on a drawback, so the charts would behoove you to wait. If we had 5 years of data we would be able to be more definitive but this is the best we can do with so little data.
If you had a lot of data you’d say: “I’m bullish on Stock XYZ. The reasons are –, — and –. I want to get in. Let me see if the seasonal says now is a good time or whether I should wait.” If you are already in, late December I would raise my stops or possibly sell calls. It would depend on the strategies you are used to using and your view of the market at that point in time.
So even though there are only two years of data, from so little seasonal data you still get an inkling as to how to use seasonals to help with your trading and investing. But once again, you want 5 years of data or more.
If you are following some options hotline, ALWAYS screen the trade past the seasonals and I’m sure you’ll cut down on your losers and find better places to take profits on parts of your position. You could make a living trading options off the seasonals and some momentum indicator alone that triggered trades to look at. This is just another way for using seasonal analysis to cut your risks.