The last month of the year also tends to be one of the best. Seasonal factors – bonuses, yearend retirement account contributions and last minute tax maneuverings – account for a big part of seasonal effects. Sentiment also plays a factor. Just as markets tend to go up more on sunny days than rainy ones, so too do traders tend to become bullish with holiday good cheer, and the fresh start of the New Year.
But December typically follows a weaker half of the year, with the best six-month period usually beginning in November. Will that historical pattern repeat in 2003? The odds may be somewhat against it. Described below is an overview of the factors that may impact trading towards yearend:
Resistance: Is probably the single largest overhang facing the Santa Claus rally. Nasdaq, already up nearly 50% for the year, is having a hard time powering through 2000. Yesterday’s low volume penetration and reversal had all the makings of a tired market. So too, the pattern of explosive one day moves, and a lack of confirming follow-throughs.
Oil: The coldest period of the year is often preceded by rises in Crude prices, and this year was no different. The wildcard remains OPEC, which is looking to reduce production in order to maintain prices above the $31 level. Political unrest in South America is the other potentially random disruption.
Inflation: We believe that Inflation is non-existent, but understand why people fear resurgence. Our secular view is that inflation has been defeated. While the economy is being re-inflated, it may LOOK inflationary, but there are simply too many deflationary forces loose in the world for inflation to be much of a problem. (Look for our forthcoming piece, “10 Reasons Why There’s No Inflation”).
Money Supply: Continues to drift lower. For whatever reason, Greenspan has become a bit less compliant than he was earlier in the year – jawboning about deficits, tariffs, and account balances. Its potentially troublesome if Money Supply and Velocity do not improve in early 2004.
Year End Close Outs: Its the first winning year in four, and some managers may decide to lock in their gains and go home early. Some positions have done very well indeed this year, and may have become outsized within balanced portfolios. Prudence suggests rebalancing and selling these holdings before yearend, applying short-term pressure.
Our admonitions regarding seasonality may very well turn out to be timely. We expect a somewhat muted December.