Publisher's Note: James Dines has been a student of the markets for well over half a century. Today, he draws on that experience to explain how the market normally behaves in December going into the new year in an excerpt from The Dines Letter.
We're coming up on a strong buy signal in gold and precious metal stocks. Read on for the details.
Nick Hodge Founder & President, Outsider Club
"He that hath borrowed must pay again with shame or loss." English proverb
1) Dow-Jones Industrials: Checking all Decembers since 1950, our Research Department calculated that the Dow had risen 48 times and declined 21, for a bullish track record of 70%, ranking as the top month with the most risers. December is likewise the best month on record in the S&P 500, up 74% of the time in the same period.
TDL's overall impression of Decembers is one of churning neutrality, perhaps because of the buffeting cross-currents created by tax-motivated buying and selling, or Holiday pixilation.
There often tends to be a rally Top in November, followed by early-December weakness and then a late-December rally, for net-neutral action. So far this December that is exactly what we are seeing.
While the number of advancing Decembers is 2.3 times the number of retreaters for the Dow, extreme movements have been rare. Since 1950 there have been only ten Decembers with rises exceeding 5%: 1956, 1970, 1971, 1976, 1985, 1987, 1991, 1999, 2003 and 2010 (around one out of seven Decembers).
December declines have averaged 1.8%, with December 2002 and 2018 having been the only years since 1980 with a decline in excess of 1.8%.
Decembers "Modulate," as we at TDL call such transitions, in preparation for the important changes due at the start of every new year.
2) A short and sweet rally for traders, popularly known as the "Santa Claus Rally," has been observed in the S&P 500 during the final five trading days of the year, plus the first two in January (this year from December 24, 2019 until January 3, 2020).
The average for that rally for the past 50 years was 1.3%, as of Jan 2019. While the extent of the rallies in the last 3 years has been modest, 0.4%, 1.1%, and 1.5% respectively, it gave momentum to multiple new all-time highs in most stock indices in the succeeding months from 2017 through 2019.
As in any seasonality labeled "Rally," losses in this seven-day stretch are rare, only five times in the last 25 years, and each occurrence was particularly ominous, as described next.
The first one, in the year 2000, a 4% loss, ushered in the dot-com bust.
The second one in 2005, a year dominated by terrorism (London bombings), and natural disasters (Hurricane Katrina) in the headlines, preceded a down year for the DJI.
The third one, in 2008, coincided with the so-called "Great Recession."
The fourth one, ending January 3, 2015, highlighted by Greece's default and declines in the Euro and crude oil, also led to a down year, an unexpected occurrence within an ongoing bull market for both the DJI and the S&P 500.
The fifth and the most recent one this year preceded the most volatile period yet in this aging bull market, punctuated with DJI declines in the magnitude of 2,004, 2,058, and 1,564 points to the lows on June 3, August 15, and October 3 this year.
If Santa Claus fails again to deliver a rally, it seems that the emerging story line instead becomes the possibility of a significant setback given this record of market declines.
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3) Since 1945 we have been calculating year-end rallies beginning with the low DJI close in November or December, and ending with the high DJI close in December or January. As of 2018, the 73-year average had not varied much, at 9.9%.
Thus, assuming that the November 1, 2019 low at 27,143 holds, a projected rally toward around the 29,830 area is indicated by January 31, 2020. This Seasonality will be tested this year as prevailing conditions show pervasive flatness and "Internal Deterioration" in the market.
4) For investors expecting direction in wider quarterly periods, historical records show fourth quarters are the most profitable quarter, with gains for the Dow in 71 out of 98 years, or 72% of the time, as against 60% of the time for the other three quarters combined.
The fourth-quarter gains averaged 2.8%, as compared with 1.6%, 1.7%, and 1.3% for the first three quarters. For the S&P 500, fourth-quarter gains have averaged an impressive 3.9% over the past 39 years, up 79% of the time (31 up, 8 down). If the S&P 500 did rise by 3.9% this quarter, it would theoretically be around 3,093 by the end of 2019.
During the same period, the DJI also averaged an identical 3.9% quarterly rise, up 82% of the time (32 up, 7 down). This projects the DJI at 27,967 for the end of 2019. Those are the cold statistical percentages to play, all other things being equal - which they never are.
5) Low-priced stocks tend to get pounded lower in and around Decembers, due to America's tax-motivated selling, and normalize higher by the middle of the new year - except in bear markets when it takes longer to recover.
In the last 39 years, the ratio of the Russell 2000 (Index of small companies) to the Russell 1000 (Index of large companies), reveals a seasonal pattern of a steep rise in low-priced stocks starting mid-December to the end of January, then gradually peaking between May and July. While the Russell Indices are more popular among mutual funds, this Seasonality is nonetheless useful in gauging investors' appetite for more speculative stocks.
6) Gold: Counting the last 51 Decembers, the Dines Gold Stock Average (DIGSA) reveals no useful odds, having risen 24 times and declined 26 times (neutral once). The Dines Silver Stock Average (DISSA) is also totally neutral, up and down 25 times each, (neutral once).
However, based on Dinesism #9 DIRGS (the Dines Rule of Gold Seasonality), the first quarter has been the best performing quarter for gold and silver stocks in the past 37 years.
Thus purchases made on weakness October through December tend to work out profitably. Gold and silver bullion have likewise performed best during the first quarter, with gold performing particularly well since the start of Wave II of the gold bull market in 2001.
James Dines is legendary for having made correct forecasts that were in complete contradiction to the rest of the financial community. He is the author of five highly regarded books, including "Goldbug!," in addition to his popular newsletter, The Dines Letter, and videotaped educational series. Dines' highly successful investment strategies have been praised by Barron's, Financial Times, Forbes, Moneyline, and The New York Times, among others.