Seasonally speaking, December and January are for stocks what summer is for ice cream parlors – good for business. The Santa Claus Rally and the early January pop, in particular, are events investors have grown quite fond of.
Last year, broad U. S. indexes advanced 7.7 percent during that sweet spot of investing. However, as we know last year, was very different. Going into December 2008, stocks shed had about 45 percent of their value. This year, December caps off a 10-month, 65-percent winning streak.
The 7.7 percent gain sounds good, but investors should watch for a repeat of last year’s pattern: After early January 2009, the wheels came off and the Dow Jones (DIA) dropped more than 3,000 points in less than 90 days.
This drop was unexpected, as year-end trading had lifted Wall Street’s spirit and infused a sense of hope and security.
Contrary to the “spirit of the season,” the ETF Profit Strategy recommended using any reading above Dow 9,000 as an opportunity to sell stocks and buy short ETFs. (The ETF Profit Strategy Newsletter includes a detailed analysis of the 2000 and 500-day moving average, trend line resistances, Fibonacci retracement levels, P/E ratios, dividend yields and formulates a condensed outlook along with target levels for a top of this rally and the ultimate market bottom.)
Between January 4 and 6, the Dow hovered above 9,000 before crashing. Today, the situation is similar — with even more downside risk.
Feeling that a depression was averted, investors are feeling safe once again. The most recent investor sentiment survey by Investors Intelligence shows the highest percentage of bullish advisors since December 2007 – and we know what happened back then.
Additionally, the Investors Intelligence survey results of December 9 show the highest amount of advisors expecting a short-term pullback in 17 years.
Astute students know that the market usually does the opposite of what most expect. Based on advisor sentiment, there is some more short-term upside potential followed by some sort of a market top.
Based on long-term indicators and resistance levels, the upcoming top should last for a long time. A recent convergence of the 500 and 2000 Dow Jones moving averages points towards a major, long-term turning point.
This technical red flag is confirmed by the fact that stocks are grossly overvalued. One of the most commonly accepted measures of value, P/E ratios, is more than four times above its historic average. Combine this with a 65 percent rally that’s been inching higher and lower volume and decreasing breadth, and you’ve got a recipe for disaster.