Still no sign of the Santa Claus rally

Santa Claus rally? Where? Not in this market, apparently. We’ve been back off of holiday for two trading days now and absolutely no hint of sustained buying that would allow December to finish strongly. At the close of trade yesterday, the S&P 500 stood at 1258.17, up a picayune 1.63, the Dow closed at 10796.26, a measly gain of 18.49 for the blue chip index, and the tech haven of the Nasdaq Composite rang the closing bell at 2228.94, registering just a trifling uptick of 2.05. While this time period between Christmas and New Year’s is generally known to be a bullish time in the markets, traders are responding more with a “Bah Humbug!” than a “Ho, Ho, Ho”. Overall volume is so low this week, you would think its being doled out by Ebenezer Scrooge himself! Since a picture speaks a thousand words (or at least a few dozen), lets just check out overall volume charts on the NYSE and Nasdaq to see just how quiet its been around this holiday season.

It’s very easy to note the trend of low volume days that have been
occurring on both markets since the extremely high volume up day of December 16th, which was a quadruple witching options expiry day. The 23rd (day before the three-day holiday) is of course expected to be quiet, so we’ll cut the market some slack there and leave it out of our analysis. Unfortunately, as seen from the charts above, its not the only day of low turnover in the markets. Notice that over the last two trading days, overall volume has picked up some but still well below average and that the trend of contraction in total turnover is still sharply down with no signs of improvement. When overall volume is low, it tells us that institutions (whose trading activity is the real engine of the market) are just not participating. Why is this? Do they not like equities anymore? Does the currently inverted yield curve have them spooked at this point? Are all the trading desks of all the major firms participating in a group field trip to Bora Bora? The answer is simple. Who cares?
That’s right, who cares? Knowing the “why” will never make you money in the markets. Although it provides endless fodder for the talking heads on CNBC and may make you more interesting at that office holiday party, true students of the markets know that its the “what”, and more importantly how the markets react to the “what” that divides the winners from the losers in this game. So, in the spirit of leaving the “why” to the economists of the world, and reacting to the “what”, our job is simply to note this contraction in turnover and the rather torpid performance in the markets as of late.

At the start of this commentary, we used a term called “Santa Claus rally”. This simply means an after Christmas rally delivered as a gift to traders from Santa Claus. While its far outside of the scope of this discussion to pore over the Stock Traders Almanac and analyze what exact correlation (if any) there is between this particular time of year and bullish price action in the markets, its apparent at first glance that no such term would ever have been coined if there wasn’t at least some such seasonality over the last 20 years or so. The same holds true for another term often heard at this time of year, that being “January Effect”. This is simply defined as a tendency of the stock market to rise during the first week in January due to the effects of investors reinvesting money back into the equities markets that they received just days prior from tax sales on losing positions.

So, knowing that these two phenomena exist with enough frequency that they’ve been added to the nomenclature of
market speak, tells us that at least some investors and traders are expecting them to happen. As sophisticated market observers know, there is often a disconnect between what people expect to happen in the markets, and what actually does happen. (Connect any two higher lows anywhere on any chart and check out the increase in volume the next time that trendline is broken if you need proof.) This disconnect should always serve as a warning to investors holding stocks in the same direction as those in the expecting camp and also as a signal of possible opportunity ahead for those watching from the sidelines. Whichever camp you are in, trade what is actually happening, and not what you expect to happen due to seasonality.

Note that the U.S. equities markets will be closed on Monday, January 2. As such, The Wagner Daily will not be published that day, but regular publication will resume on January 3. MTG wishes you and your family a safe and happy ride into the new year!

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .