Jeff Saut Presents: The December Low Indicator - A Useful Prognosticating Tool
The world will have to increasingly decide how to allocate its use of oil, as well as move to some other kind of energy for such things as electricity generation.
Editor's Note: The following article was written by Raymond James Chief Investment Strategist, Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.
"When the Dow closes below its December closing low in the first quarter, it is frequently an excellent warning sign. Jeffrey D. Saut, Managing Director of Research, and Chief Investment Strategist at Raymond James, brought this to our attention a few years ago. The December Low Indicator was originated by Lucien Hooper, a Forbes columnist and Wall Street analyst back in the 1970s. Hooper dismissed the importance of January and January's first week as reliable indicators. He noted that the trend could be random or even manipulated during a holiday-shortened week. Instead, said Hooper, 'Pay much more attention to the December low. If that low is violated during the first quarter of the New Year, watch out!'
Thirteen of the 27 occurrences were followed by gains for the rest of the year – and twelve full-year gains – after the low for the year was reached. For perspective we've included the January Barometer readings for the selected years. Hooper's 'Watch Out' warning was absolutely correct, though. All but one of the instances since 1952 experienced further declines, as the Dow fell an additional 10.5% on average when December's low was breached in Q1.
Only three significant drops occurred (not shown) when December's low was not breached in Q1 (1974, 1981 and 1987). Both indicators were wrong only three times and six years ended flat. If the December low is not crossed, turn to our January Barometer for guidance. It has been virtually perfect, right nearly 100% of these times (view the complete results at www.stocktradersalmanac.com)."
-The Stock Trader's Almanac
"Just by the hair on my chinny-chin-chin," was my chant from Cleveland last week as the DJIA seemed to have been "saved" by President Bush's surprise visit to the NYSE last Wednesday, which saved the day as well as the week. The result allowed most of the indices I follow to close the month on a positive note and thus render a bullish signal for that old stock market axiom, "So goes the month of January, so goes the year!" For the week the DJIA gained 1.3%, which coincidentally was also its gain for the month.
Interestingly, the DJIA has now gone 140 trading sessions without so much as a 2% decline for its longest such skein is some 47 years. Not to be outdone, the S&P 500's 1.4% January-jump made it eight months in a row on the upside and that feat has occurred only 10 other times since 1926. Despite these heady statistics, US markets actually lagged most of the world's markets with the MSCI World Index up 1.7% in January, paced by China (+26%), Pakistan (+12%), the Philippines (+8%), and Malaysia (+8%) to name but a few. Even Latin America was up 2.2% in spite of Venezuela's crashette (-15%) on Hugo Chavez's nationalization of some foreign-owned companies. While my firm looks smart, having embraced many of the emerging markets over the last five years, January made us look stupid once again on our "call" of a year ago that large caps would strategically be the place to overweight going forward. Indeed, the S&P MidCap 400 posted better results than its large cap brother (S&P 500) with a gain of 3.6% for the month. Moreover, 9 of the 10 MidCap sectors improved with materials being the best performing sector. Of course, that performance did help my firm regain some composure since we have/continue to be long numerous "materials" stocks on the belief that as billions of people enter the modern economy they are going to consume more "stuff."
For five years I have defined "stuff" as not just oil, natural gas, and coal, but cement, grains, fertilizer, water, base/precious-metals, uranium, timber, diamonds, etc. Most recently, after being "shy" of energy since May 2006, my firm started re-buying energy stocks in mid-January on the sense that crude oil was reaching for a bottom. With crude oil around $50/barrel, my firm's statement at the time was:
"(We believe) the latest crude oil prices are reaching the point of being overdone with respect to the fundamentals. As the Kiplinger organization notes, 'By 2030, figure on world oil consumption in the neighborhood of 118 million barrels a day, up 40% from today... So no let up in global competition for reliable supplies of oil, natural gas and coal as discoveries of new sources come less frequently.' We urge you to read the aforementioned Kiplinger quote, reread it, and then think about long-life oil reserves (50+ years worth of reserves)."
Indeed, there are only two long-life reserves that I know of left on the planet, the Orinoco Tar Sands in Venezuela that are likely to nationalized by Chavez and the Alberta Tar Sands in Canada, which we have invested in for more than five years. Yet, my firm thinks the Kiplinger statement actually understates the oil situation. Currently the world consumes more than 30 billion barrels of oil per year. However, over the past few decades my firm has been discovering only 9 billion barrels per year. Plainly, discovery rates are falling; a fact reiterated by most of the major oil companies, who admit they can't replace the reserves they are draining. As the populations of China and India increasingly enter the 21st century, we can only see the demand for crude oil rising. Consequently, when the permanent production peak occurs in the next few years, prices have nowhere to go but up, consistent with our mantra, "The era of cheap oil is over."
If my views prove correct, the world will have to increasingly decide how to allocate its use of oil, as well as move to some other kind of energy for such things as electricity generation. While solar power, ethanol, and hybrid cars will prove helpful, they fall WAY short of rectifying the situation. For the past few years my firm has suggested that the world's only way out is nuclear reactors, clean coal technologies, and gasification technologies. We continue to feel this way and have invested accordingly. For investment ideas along these lines, we suggest perusing our energy team's recent Canadian Oil Sands report, as well as comments from our alternative energy analyst Pavel Molchanov.
As for the here and now, of all the indices my firm monitors, the one that gained the most last week was the D-J Transportation Average (DJTA). We find the Transport's 6.24% weekly gain quite impressive, especially considering crude oil's 6.49% weekly rise. Whatever the reason, last week the Transports FINALLY confirmed the DJIA's upside breakout to new highs by bettering its May 9, 2006 all-time closing high of 4998.95. While it's true that the longer a confirmation takes to occur the less meaning it has, we still find the Transport's action impressive and suggestive of a stronger than anticipated economy. Likewise, the continuing rise in interest rates implies a stronger economy, as does the stronger dollar that last week continued to digest its gains from our early December low "buy signal."
Offsetting my firm's stronger economy thesis was last week's 10% collapse in zinc prices with a concomitant 8% crash in copper prices to new reaction lows. Hereto, however, things continue to get "curiouser and curiouser" as natural gas prices popped by nearly 17% while gold prices broke out to the upside in the charts. Even the economic data showed disparate results, as reflected in recent comments by our firm's economist Scott Brown, Ph.D.:
"Last week's economic data were mixed and did little to clarify the near-term direction for the economy. Real GDP for the fourth quarter surprised to the upside, largely due to a narrower-than-expected trade deficit and a pop in defense spending. In contrast to the fourth quarter's apparent strength, business fixed investment and imports both declined – suggesting softness in domestic demand. Manufacturing activity weakened a bit further in January. Job growth, uneven over the last several months, continued to reflect a strong trend. The Fed's policy statement was a bit brighter, but policymakers retained a slight bias to raise rates in the months ahead. In short, nothing is any clearer."
To which I add, "Indeed, curiouser and curiouser."
The call for this week: My firm is in Texas all week seeing companies, speaking to institutional accounts, and conducting seminars for our retail financial advisors. Hopefully our conversations will shed some light on the future direction of oil prices, which are at a pretty key juncture, as can be seen in the below chart. Still, since mid-January oil prices have lifted roughly $10 per barrel to $60/bbl. To us this feels like more than just a "dead cat" bounce. Also "lifting" has been the aerospace and defense complex, as reflected by the PowerShares Aerospace & Defense Portfolio (PPA), which broke out to new all-time highs last week.
My firm continues to invest accordingly.
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