Stock Trader’s Alamanac: Uh-Oh

Dow is off another 180 as I type this, ostensibly on rumors of Countrywide Financial (CFC) bankruptcy.

As I noted in May 2005, while sitting next to Angelo Mozila on Larry’s show, I wanted nothing to do with the long side of that company. However, I doubt the failure of a reckless and irresponsible lender, even the biggest one in the country, is the basis for today’s schmeissing.

Instead, I suggest its the ongoing move from Denial to Anger to Bargaining to Depression to Acceptance. That’s a process that may take a while, and be met by intervening pops and drops, rallies and sell offs. . 

Meanwhile, the Stock Traders Almanac points to two indicators that are quite negative for 2008: The Santa Clause Rally, and the December low:

When the Dow closes below its December closing low in the first quarter, it
is frequently an excellent warning sign. 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!”

13 of the 27 occurrences were followed by gains for the rest of the year –
and full year gains – after the low for the year was reached. Hooper’s “Watch
Out” warning was absolutely correct. All but one of the instances since 1952
experienced further declines, as the Dow fell an additional 10.1% on average
when December’s low was breached in Q1. Only three significant drops occurred
when December’s low was not breached in Q1 (1974, 1981, and 1987).

Also, see Santa Claus Rally fizzles, points to difficult year

What's been said:

Discussions found on the web:
  1. Michael C. commented on Jan 8

    F-i-n-a-l-l-y, after 5 long years, the consumer is again showing signs of being spent up.

    “AT&T’s CEO said the company is disconnecting more home phone and broadband Internet customers for failing to pay their bills.”

    All the while, the evil Fed laboratory is trying to conjure up a new asset bubble. I hear they are close to unveiling onto the world their newest and most ingenius creation yet.

  2. Joe Klein’s conscience commented on Jan 8

    Have the S&P and Nasdaq had a positive day yet this year? I know the only one for the Dow was yesterday. Is Goldilocks dead yet?

  3. Steve Barry commented on Jan 8

    I said on Jan. 2 this would likely be the worst year in S&P history (down 43% in 1931). Nothing that has happened since has convinced me otherwise. The S&P should trade IMO at .8 times my estimated sales of 900/share during the year. That’s 720, about a 50% drop.

  4. UrbanDigs commented on Jan 8

    Julian Robertson predicting doom didnt help either!

  5. Justin commented on Jan 8

    Am I getting this correctly – the times that it did not have any affect was in years that had already seen a fairly substantial downside…hmmmm! How far down do we go from here…this could get scary Pilgrims!

  6. donna commented on Jan 8

    Any boomer nearing retirement must be pulling out money like mad. I’m only 50 and I’m worried right now.

    With the fed planning to tank the dollar, there isn’t too much good news right now, or even a clearly safe place to put money. Plus the neocons are STILL trying to drum up for a war with Iran – they really need to cut it out or they will insure a Dem is elected.

    We need a new plan, and it is now obvious to everyone. Iraq didn’t save us, oil is not going to get cheaper – and there are no more assets to inflate.

    New direction, please.

  7. babygal commented on Jan 8

    Hee Hee-I pulled everything out about a month ago. It’s the bloodhound in me. Plus reading The Big Picture HELPS!

  8. Brian B. commented on Jan 8

    Donna,

    So Donna, give me some ideas on your direction please? What would you do? I just had 7 great years. Opened a small business, sold it for a substantial profit, went into the home loan business, made some more easy money, then bought and sold 3 homes in california and made some really nice money. But I didnt think it was going to last forever. So now i am out and shorting the market everyday.. and making more money. You have to be flexible. I dont care who the president is, there has been some fantastic oppurtunities these last 7 years.

  9. 2and20 commented on Jan 8

    Let’s face it, the economy/consumer/US always pulls through (even though right now it looks like the end is nigh)…One of the few things that can save the US now, or at least significantly cushion the blow, is an oil price collapse.

    $100 going to $25 anyone?

  10. Donny commented on Jan 8

    Today was like sex for my portfolio. Thanks Perma-Bulls for creating this obvious opportunity!

  11. Costa commented on Jan 8

    what would be a good play to benefit from consumer debit going through the roof?

  12. Byno commented on Jan 8

    Arghhh!!!!!!

    With all due respect, the people at Stock Trader’s Almanac appear to be statistically illiterate.

    Looking at their numbers, if I don’t reinvest my dividends, I actually wind up gaining an average of 3.5% if I just hold what I’ve got. If I’m reinvesting dividends that number is much higher – better than simply getting out and going to treasuries for certain.

    Furthermore, in performing a few quick z test, there is nothing that distinguishes Mr. Hooper’s *indicator* from plain and simple luck. That is, unless your willing to accept alphas (not jensen’s alpha) that tell you less than nothing.

    If you wanna smack me down for doing this, do so and I won’t do it again Barry, but I’ve written an article over at Seeking Alpha precisely along these lines.

    http://seekingalpha.com/article/59091-a-twist-on-the-january-effect

    It’s a bit heavy on the stats, but if you read through the comments I’ve given a small primer.

  13. Byno commented on Jan 8

    should have been a you’re. Oops.

  14. RichardN commented on Jan 8

    Where is Michael Schumacher? It gets so quiet here when we have these down days as the fed removes liquidity. Wait, damn! That must mean the three flashes from BB’s bedroom at night don’t mean buy after all! Yet he did it again yesterday!

  15. dblwyo commented on Jan 8

    I thought the K-R model applied to the market was one of your best riffs yet. And started wondering how long it’ll take to reach stage 5 on the bad stuff we know about. And how much longer for the real housing, credit, consumer and investment challenges to work thru as well. While the techs are down it wasn’t long ago when everybody wasn’t even in denial but in pre-denial, otherwise known as “duoh”.
    Anyway, FWIW, liked the K-R riff so much I stole and filed off the serial numbers with due recognition and plaudits of course.
    More on Tech Perform & Outlook: http://tinyurl.com/2usbbh

  16. Richard commented on Jan 8

    sure brian, everything you’ve done turns to gold cause you’re just smarter than everyone else. it’s fun to post on a blog you could be and say whatever you want.

  17. Matt M. commented on Jan 8

    I trade both sides and am long SRS/SKF, but there’s no place to hide on the long side….former high RS names faltering. Tough trading environment for those not 100% cash or short, and I’m rarely 100% anything. Disappointed oil services and oil haven’t been able to hold in. DBA remains strong for now.

  18. wunsacon commented on Jan 8

    >> I just had 7 great years. Opened a small business, sold it for a substantial profit, went into the home loan business, made some more easy money, then bought and sold 3 homes in california and made some really nice money.

    Brian, just out of curiosity, do you know how your former customers and investors are doing?

  19. boomdotbust commented on Jan 8

    I was going to save this link for the “depression” phase of the market, but I figured we may as well take a few minutes now to refresh ourselves on the events back in 1929 that led to the real thing…

    http://stockmarketcrash.atspace.com

    The more I read about the 1929 Crash and the Fed’s easy money policy for 4-5 years prior to the debacle, the more I feel good about being mostly in short term cash equivalents for now.

  20. Pool Shark commented on Jan 8

    Matt M.,

    “there’s no place to hide on the long side.”

    Have you considered gold stocks?

    The XAU is up around 9% so far in 2008, and the Gold/XAU ratio is still at a relativley high 4.66 (plenty of room remaining on the upside for miners).

    The junior producers have only just begun their move to the upside (they historically lag the price of gold by a quarter or so).

  21. Brian B. commented on Jan 8

    Richard,

    you are correct, sorry wasn’t trying to brag (even though after re-reading it, it sure looks that way), just trying to say that there were plenty of chances to make money, the last 7 years. Also, you might be right, maybe it was just plain luck. I can back up anything I say. I have written my past exploits on here many times.

    Wunsacon,

    Yes, my restaurant did not do very well after I sold it. What can I do, I left it with monthly high sales. The new owner didnt do very well. As for my loan customers, yes the ones I have contact with they are ok. I only did loans that I felt comfortable with their D.T.I.’s. And I stopped doing loans when I didn’t feel comfortable with the housing market values not rising any longer. I could of done many more loans than I did, but believe or not I have some morales. :)

  22. Winston Munn commented on Jan 8

    The Fed can add liquidity; the Fed cannot create capital; what is evaporating is capital based on overvalued assets.

    The Fed is quickly becoming impotent; until this is thoroughly understood, acceptance is a long ways off.

    Destruction of capital and its underlying assets will be a deflationary event – most incidents of rising prices have been caused by the hocus pocus of remaining capital fleeing into hard assets; as the world recouples with the U.S economy, even these hard commondities will fail to hold inflated values as the U.S. recession deepens.

  23. donna commented on Jan 8

    Brian,

    We need to look at long-term sustainable goals for the country and abandon the schemes of inflating assets and making money by selling debt to each other.

    If the country isn’t actually producing anything, it’s very difficult to sustain the economy.

    Individuals, and even some companies, are indeed doing well. As an individual family we are doing fine – but also have other family members and friends who are not and cannot due to disabilities, etc. And overall, most people are not doing very well right now, with massive levels of debt for individuals, companies, state and local and federal government. And my husband and I both used to work for American companies – he is now working for a foreign company and I am doing consulting work. I have no clue where my kids will be able to work once they are done with college, and before then, all there are is service jobs flipping burgers which they have no interest in doing.

    We ALL need to stop thinking only of ourselves and create an economy where most people can do well and we can provide for public services.

    I am looking for a national program including single payer care for the basics and catastrophic coverage, to take the burden off individuals and companies to pay for necessary health care, with individual insurance still an option for those who can afford it and want additional coverage, an energy program creating sources of alternative energy other than oil, conservation programs to reduce dependencies on foreign oil, restructured cities and public transportation, etc to reduce the need for fuel use. This would revitalize the country and provide jobs as well as putting us on a footing to truly compete in the world. We won’t maintain dominance militarily forever, we simply can’t afford to. And we need to re-energize American manufacturing and stop relying on cheap China imports.

    I know not everyone thinks this way, but I’m a registered libertarian and these are the viable choices I see! It’s strange that I am now working with the progressives, but there you go.

  24. Cameron Dean commented on Jan 8

    Hmmm… this is only my second post here… usually, I am passive… I like to keep my powder dry till I feel like shooting… its time to shoot again. Back on Aug. 16, I posted that I felt things had gotten “overblown”. Do I feel that we are at that point now? No. Shortly after beginning of the year, I moved to 30% equities; of the equities I am holding the majority are non-U.S. The other 70% is in inflation-protected bonds.

    Just remember everyone, the market always over reacts whether it is going up, or down. This time will not be any different; it never is. Human psychology doesn’t change.

    The market to me is just an enormous crowd psychology experiment. The trick is learning to sense when the crowd is right, when the crowd is confused, and when the crowd is wrong. I think the crowd is right, for now; but, just for now. See you again when I think the crowd is confused or wrong.

  25. Brian B. commented on Jan 8

    Donna,

    Accepted, I may not agree with everything but at least you have some ideas. My only question is that you say, “most people are not doing well”. 3 months ago, unemployment was at extreme lows, and the stock market was at highs. Household income was also high(albeit most of that is in paper profits due to the housing bubble).

    It may not be perfect for everyone but everyone i know has a microwave, cell phone, cable tv, a computer, dvd’s, etc… all those little things that add up, that we didnt NEED 20 years ago. Anyhow, not trying to pick on you Donna, you sound like a fine individual. Good luck with your future success.

  26. Hawk commented on Jan 9

    Stock Trader’s Almanac also said Dow was going to 16K (by Dec 31 2007) in October.

    Their call in 2002 was great. They keep missing after 2003.

Read this next.

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