Here at Market Remarks, we are a big believer in the seasonality of the market. There are various reasons why different market sectors show noticeable seasonal tendencies but there is no doubt that many of these cyclical gyrations are significant. Back testing these market recurrences with systematic methods produce reasonable assessment of the associated probabilities of success and risk-reward levels that serve as foundation for many of our trading strategies that aim to exploit market’s seasonal movements. We have covered many of them in several articles in the past.
We also review and analyze many chart and price patterns of a variety of securities and asset classes. The seasonal and chart analysis, together with fundamental and macro-economic analysis, help us understand the market and speculate its potential short and medium term direction.
We also believe that investment and/or trading is all about managing probability and risk-reward ratio. This means that before taking any action in the market you must have an understanding of its probability of success and the amount that you are risking to realize the potential gain.
With that as a background let’s assess market’s bumpy start of 2015.
The 2014 Santa Claus Rally, which, according to Stock Traders Almanac, lasts over the final five trading days of the old year and first two trading days of the new year, did not deliver this time. Since 1950, over this seven-trading day period the S&P 500 has failed to advance only 13 times (excluding 2014) giving a success rate of 80%. The average gain had been 1.5% but in 2014 the rally produced a loss of 3.0%. The last time the rally produced a similar loss was in 2007, when it lost 2.5%, and then in 2008 it lost 38%. So naturally traders are jittery. To compound this miss-fired rally, S&P 500 also declined for five consecutive days – two in 2014 and three in 2015 – something that it did not do since December 5, 2013.
We will talk more about that later in this report first do the numbers.
Week In A Nut Shell
- The first two days of the week were down days for the market. Next two were up but finally the week closed with a down Friday. The collage of red and blue numbers for the week, 3-month and 1-year period do not give the indication that things are that bad rather they pain a picture of typical global equity market environment.
| Week | 3-Month | 1 Year | Week | 3-Month | 1 Year | ||
| North America | VIX | -(1.3)% | +13.5% | +29.5% | |||
| DJIA | -(0.5)% | +7.2% | +7.9% | Global Dow | -(1.4)% | +1.1% | -(0.7)% |
| S&P 500 | -(0.7)% | +7.3% | +11.0% | Latin America | |||
| NASDAQ | -(0.5)% | +10.0% | +12.7% | Brazil | +0.7% | -(11.8)% | -(1.7)% |
| Dow Transport | -(2.6)% | +12.2% | +18.6% | Mexico | +0.6% | -(2.4)% | -(0.2)% |
| Russell 2000 | -(1.1)% | +12.6% | +1.8% | ||||
| Europe | Asia & Pacific | ||||||
| UK FTSE 100 | -(0.7)% | +2.5% | -(3.5)% | Shanghai | +1.6% | +38.4% | +63.2% |
| German DAX | -(1.2)% | +9.8% | +1.9% | Nikkei 225 | -(1.5)% | +12.4% | +8.1% |
| French CAC40 | -(1.7)% | +2.6% | -(1.7)% | Hang Seng | +0.3% | +3.6% | +4.7% |
| Spain | -(6.1)% | -(4.3)% | -(5.6)% | South Korea | -(0.1)% | -(0.8)% | -(0.7)% |
| Italy | -(5.0)% | -(5.3)% | -(7.1)% | Australia | +0.5% | +5.3% | +2.9% |
| Switzerland | +1.4% | +8.7% | +8.9% | Bombay | -(1.5)% | +4.4% | +32.3% |
| Russia | -(1.0)% | -(26.5)% | -(43.9)% | Indonesia | -(0.5)% | +5.1% | +22.6% |
| Turkey | +2.6% | +19.3% | +29.1% | Thailand | +2.1% | -(1.5)% | +21.8% |
- Treasury yields were under pressure. Long term yields were down for the week, 3-month and 1-year period. So, naturally the bonds rose.
| Treasuries | |||||||
| 30 Yr Yields | -(5.2)% | -(15.8)% | -(32.7)% | 13 Wk Yields | 0.0% | 200.0% | -(54.5)% |
| 10 Yr Yields | -(7.2)% | -(14.6)% | -(31.1)% | 30 Yr Bond | 1.4% | 5.5% | 17.2% |
- Commodities have been under pressure for some time. Goldman Sachs Commodity Index (GSCI) was down 5% for the week. It has lost nearly 30% over the past 3-months. Energy and industrial commodities were mostly down in tandem with GSCI. Agricultural commodities were mixed.
| Resource Commodities | Agricultural Commodities | ||||||
| GSCI Index | -(4.8)% | -(28.7)% | -(35.3)% | Corn | 1.0% | 20.0% | -(7.5)% |
| Wheat | -(3.0)% | 13.0% | -(0.9)% | ||||
| Light Crude | -(8.2)% | -(43.6)% | -(47.8)% | Soybeans | 4.0% | 14.0% | -(17.7)% |
| Nat Gas | -(1.9)% | -(23.7)% | -(27.3)% | Sugar | 5.0% | -(9.9)% | -(4.2)% |
| Gold | 3.0% | -(0.5)% | -(2.5)% | Coffee | 12.0% | -(18.3)% | 49.0% |
| Silver | 4.0% | -(5.1)% | -(18.8)% | Cotton | 2.0% | -(5.2)% | -(26.4)% |
| Copper | -(2.2)% | -(9.2)% | -(17.6)% | Cocoa | 1.0% | -(6.0)% | 9.0% |
- Forex market was volatile. Dollar index gained so naturally its major components, Euro and Yen, declined. Below is how some of the currencies have fared compared to US dollar.
| Major Currencies | BRIC Currencies | ||||||
| Dollar Index | 0.8% | 7.1% | 14.1% | Brazil | 2.5% | -(9.8)% | -(2.6)% |
| Russia | -(4.5)% | -(31.3)% | -(18.3)% | ||||
| Euro | -(1.3)% | -(6.2)% | -(13.4)% | India | 1.9% | -(3.2)% | 0.2% |
| British Pound | -(1.1)% | -(5.7)% | -(8.0)% | China | -(0.1)% | -(1.2)% | -(1.3)% |
| Japanese Yen | 1.7% | -(10.7)% | -(3.2)% | BRIC Composite | -(0.8)% | -(15.6)% | -(21.0)% |
| Swiss Franc | -(1.3)% | -(4.4)% | -(5.7)% | ||||
| Crude Oil Currencies | Other Currencies | ||||||
| Canada | -(0.7)% | -(5.0)% | -(2.8)% | Indonesia | -(0.9)% | -(2.6)% | -(0.5)% |
| Sweden | -(1.6)% | -(8.9)% | -(10.2)% | Turkey | 2.2% | -(2.6)% | -(5.3)% |
| Norway | -(1.0)% | -(14.1)% | -(5.6)% | South Korea | 1.3% | -(2.8)% | -(1.4)% |
| Saudi Arabia | -(0.0)% | -(0.1)% | -(0.0)% | Argentina | -(0.4)% | -(0.9)% | -(21.4)% |
| Mexico | 1.6% | -(9.2)% | -(3.7)% | Malaysia | -(1.3)% | -(7.4)% | 0.4% |
| Other Commodity Currencies | Thailand | 0.3% | -(1.5)% | 1.6% | |||
| South Africa | 1.9% | -(5.1)% | -(4.2)% | ||||
| Australia | 1.4% | -(5.5)% | -(8.8)% | ||||
| New Zealand | 1.8% | 0.3% | -(5.5)% | ||||
| Peru | -(0.6)% | -(2.1)% | -(3.7)% | ||||
Economic Report Card
The week’s economic reports delivered mixed data.
- EuropeanUniondatawas mixed but indicating a slow-down and deflationary forces seems to be lurking
- German Unemployment Change was better than estimated but Spanish and Italian Unemployment Change were worse
- German Factory orders m/m disappointed so did German and French Industrial Production m/m
- German Trade balance was worse but French was better than forecast
- Germany’s Retail Sales m/m was better at 1.0%
- Spanish Services PMI was better but Italian Services PMI was worse than forecast
- Germany’s Preliminary CPI m/m at 0.0% was lower than estimate so was EU Flash CPI y/y of -0.2%, though the Core CPI Flash estimate y/y came at 0.8%; Italian CPI was 0.0%
- United Kingdom’s reports were not too good either
- The construction PMI and Services PMI were lower than the estimates
- Manufacturing Production m/m and the Trade Balance were better than forecast
- United States
- ISM Non-Manufacturing PMI, Final Services PMI, Factory orders and Wholesale Inventories m/m were lower than the forecast
- Consumer credit m/m was worse than expected and so was the Average Hourly Earnings m/m, which was negative
- The Non-Farm Payroll for December was 252K and the earlier months’ numbers were revised up
- Canada is slowing down too
- Trade Balance was lower at -0.6B; RMPI m/m was worse than forecast so was Building Permits m/m but Ivey PMI was better
- Employment Change was worse and the unemployment rate remained the same
- AsiaandOceaniawas mixed
- Australia’s trade balance was better than the forecast. So was the Building Approvals m/m but the Retail Sales m/m was worse
- China’s CPI y/y was 1.5% but the PPI y/y was -3.3%
January Impact
Stock Trader’s Almanac has done yeoman’s work in identifying various calendar based trends and trading opportunities. We have done more work on it and adapted the findings to our trading style and strategies. One such trend is S&P 500’s performance in the first five trading days of the year and the month of January – the so called Almanac’s January Barometer. Following is based upon our analysis and Almanac.
Earlier in this report we mentioned the 77% success rate for the Santa Claus Rally (SCR) from 1950 to 2014. When the SCR delivers a gain then over the First Five Trading Day (FFTD) of the new year the S&P500 has been up 72% of times. On the other hand if the SCR ended in a loss then the FFTD was up only 23% of times (excluding 2015). This year, despite the going negative during SCR, the index was up over the FFTD.
Some more data analysis:
- When the S&P 500 waspositivefortheFFTD then:
- The month of January was positive 75% of times with average gain of 2.5%. The average gain was 4.7% when January was up and average loss was 4.0% loss when it was down
- The Year ended positive 88% of times with average gain of 14.0%. The average gain during such an up year was 17.8% and the average loss was -12.3% when the year was down
Off course one can not trade based upon this information only but it is useful in forming a bias for the rest of the month and the year.
