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Ill-gotten Gains


Patience can be a bear's best friend!

We all know that late December has typically been pretty positive. Since 1950, the S&P has never seen a decline of 3% or more during the last 10 trading days of December, while it has seen gains of 3% or greater on nine separate occasions. That 10-day block of time has been positive 80% of the time, showing an average gain of 1.6%, so there is certainly evidence backing up what so many give as a reason to be bullish now.

What may be somewhat surprising is that once the market swallows the next couple of weeks, we enter what has been a treacherous time, at least for the Nasdaq 100. Since 1986, the NDX has only gone three years without seeing at least a 5% drop within a 10 day window in January. That phenomenon has happened in each of the last 13 years running. 11 out of the 15 years that did show such a short-term peak formed its apex before the 12th trading day of the new year - on average it topped out around the 8th trading day of the month. 68% of the time, the decline was between 5.8% and 12.4%, so these are considerable corrections we're talking about.

With trader sentiment where it is now, should the positive seasonality hold up as it has consistently in the past, then any gains gotten I believe will be given back during or before February. The historical evidence for a pullback given the figures we're seeing are too strong, and the January "give-back" too consistent, to not have some faith that we'll see today's prices or lower early next year.
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