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Monthly Archives: December 2010

End of Year Market Analysis

As today is the last day of the year 2010, I wanted to run a study on the market using the S&P index over the past 10 years for the last trading day of the year along with the first trading day of the year.  Usually, I will give an odds analysis using percentages, but I won’t necessarily go that route for this piece since I am using only a few data points from just the past decade.  Below is the filtered data using the S&P futures:

End of Year Market Analysis

Note: “December Return” is the cash S&P monthly return.

I will focus this analysis on the closing pivots (using the Camarilla method of calculation).  Since the end of 1999, on the last trading day of December the S&P future closed below S4 on 5 instances out of 11, making the below S4 close the most frequent occurrence.  I am not going to focus as much on odds in this analysis, but given the minimal amount of data points, I will try to view these data results in a broader context.  Hence, I have included the December SPX returns as well.  The month of December tends to be a strong month.  In fact in the month of December the S&P only closed down over 1% once since Dec. 1999.  (December 2002 was the outlier, closing down 6% that month.)  Today’s trading day is not over, but so far the MTD change for Dec. 2010 is up 6.7%.  So in examining the above chart, I will look to the instances when the December return was high.  When I look at Dec. 2004, 2003, and 1999 when the December returns were 3.25%, 5.08% and 5.78%, respectively, the futures never closed below S3 (closed twice between S3/R3 and once above R4).  So despite the relatively frequent occurrence of below S4 closes on the last day of the year, I feel hesitant to lean on those odds given that in the stronger months, the market closed above S3.

Now shifting the attention to the first day of the year trading, the closing pivots are pretty much split with 4 below S4 closes and 4 above R4 closes (the other 3 times the market closed between S3/R3).  Again, I will look at the times when the December returns were strong.  So on the first day in January following a strong December month, the market closed below S4 twice and between S3/R3 once.  In regards to Monday’s trading, I am leaning towards a pull back below S4.  Since the pivots will continue to be tight, I am not expecting a huge down move, just a small pull back.

Hedge Fund Live - Now with 11 Times More Betty Lee

Ascending Continuation Triangle


The Ascending Triangle  will have two converging trendlines, the lowers trendline will be rising while the upper trendline is horizontal.  This pattern occurs because buyers are willing to step in at higher lows but the highs are maintaining a constant price level.  The pattern should have two highs and two lows all touching the trendlines.

Important Characteristics

Technical analysts pay attention to how long the Triangle takes to develop to its apex.  A general rule is that prices should break out somewhere between three quarters and two thirds of the horizontal width of the formation.  The break out should occur well before the pattern reaches the apex of the Triangle.  The closer the breakout occurs to the apex the less reliable the formation

Duration:  Relatively short term pattern.  Could take 2-3 months to form.  The longer the pattern the longer it will take for the price to move to the target price, the shorter the pattern the quicker the move.

Shape:  The top trendline does not need to be completely horizontal but it should be close to horizontal.

Target Price:  A good rule is that the target price must indicate a potential return of 5% or more before a pattern should be considered useful.

Inbound Trend:  A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins.  Look for an inbound trend that is longer than the duration of the pattern.  The inbound trend should be at least two times the duration of the pattern.

Volume:  A strong spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern.  The volume spike should be significantly above the average of the volume during the duration of the pattern.  The volume during the duration of the pattern should be declining on average.



Seeing a Bit of Pressure Ahead of New Year, Similar to Day Before Christmas Eve

Morning Notes

- Overseas mkts are mixed with Asian markets (note: Nikkei is closed) closed up while the European markets are currently down (note: DAX is closed)
- Shanghai showed some noticeable strength, closing up 1.8%
- In China MNI Business Condition Survey posted a drop

Happy New Year

- In UK, housing prices increased for the first time since May 2010
- Crude lower again (see yesterday’s action) this morning
- Gold up this morning
- S&P futures are down in the pre, about 3.25 handles from FV, trading right along S4 pivot level
- Just to recap, S&P is up about 12.8% YTD and up about 6.5% MTD
- In corporate news, IMAX is up 13% in the pre on reports from the UK Daily Mail that SNE may be interested in the co.
- Meanwhile, BGP is down over 17% in the pre no report that it delayed pmts to certain vendors while trying to refinance
- Select European markets (including the FTSE) are closing early today on this New Year’s Eve holiday
- No economic data releases scheduled for today so the quiet trading will likely resume today

Enter the Dragon Rally

Now that the Santa Clause rally is over, perhaps we are now approaching the, wait for it, Dragon rally.

Dragon Rally

What the hell is a Dragon rally?  If the month of December typically is a rally month in the U.S. due to performance chasing as well as pscyhological/behavioral market patterns, the same type of action might be observed with the approach of the end of the Lunar calendar in China (and other Asian countries that follow the Lunar calendar such as Taiwan and Singapore).  There are only a few articles/blogs that I found on this topic through a quick search.  Observations are mixed actually on whether the rally occurs before or after the Lunar New Year.  I took a look at the data from the past decade (since Jan. 2000) and used the Shanghai Composite index to gauge the performance of the Chinese market while sticking to the S&P index, as usual, for U.S. market performance.  Below are the Shanghai and S&P average and median returns for the 10, 20, and 30 days leading up to and following the Lunar New Year:

Shanghai Lunar New Year Effect

The above data shows that on average the Shanghai Comp does rally into year end, according to the Lunar calendar, particularly in the 20 and 10 days leading up to the New Year.  There is not a sell off following the New Year, however, the move does slow in the subsequent 10, 20, and 30 days.

S&P Lunar New Year Effect

The Shanghai index has been outperforming the S&P over the past decade around this Jan/Feb time period.  In fact, the average returns in the S&P in the three time periods leading up to the Lunar New Year are all negative.  Given this added context, the rally in the Shanghai in the days prior to the Lunar New Year is validated further, i.e., the strong returns are not just part of a wider global rally during these times of the year.

This end of year rally according to the Lunar calendar is what I am dubbing the Dragon rally.  Yes, a little lame, but that’s what you get at Hedge Fund LIVE quite often.  Anyway, in light of this rally that I am expecting in the Chinese market in the month or so leading up to the their New Year, which falls on Feb. 3 next year, here are lists of strong Chinese stocks that have rallied this year along with the beaten up names.  Among the top performers include SPRD, FFHL, JOBS, BIDU, and MPEL (in descending YTD return order).  The five worst performers this year are VISN, FUQI, NED, YTEC, and JST (in ascending YTD return order).  I would browse through the beaten up names more closely to select names that are still down, but don’t look too shitty to buy.  Maybe YGE, for instance, which is sitting on some good support levels on the daily.  I’ll caveat by saying I do not know about the outlook for the solar names though.  SUTR just had a breakout today in the Basic Materials space.  A name that I know Tynik has traded several times, NTES, looks like it’s rounding up, although it faces resistance after today around the 200d SMA.  I don’t know the fundamental story here, but a breakout above the 200d SMA will be a healthy sign for the stock and a lower risk buying opportunity.

2011, Year of the Bull?

2011 - Year of the Mad Bull? by Areade Dare

Jobless Claims at Lowest Level Since July 2008, But No One Seems to Care

Morning Notes

- Noteworthy overseas mkt action was in Nikkei, which closed down 1.1% with weakness attributed to strength in the yen
- Nikkei will be closed tomorrow so today was year end trading for the Japanese index
- Comments out of China from the PBOC around potential for more rate hikes in the first half of 2011; also mentioned that appreciation of the yuan would help the Chinese economy, not harm it
- Quiet trading in Europe again and indices there are down small

Best Jobless Claims Number, But No One Cares

- Commodities are flat
- Dollar is weak again
- S&P futures are pretty much unch’d
- Initial Jobless Claims: 388K vs. 416K; prior revised up to 422K from 420K
- Continuing Claims: 4.128M; prior was 4.071M

- Initial Claims number of 388K is actually the lowest level since July 2008, so certainly a positive sign for the economy
- S&P futures not reacting too much to the claims number release
- Remaining on the economic calendar for today: Chicago PMI @ 9:45a ET; Pending Home Sales @ 10a; Crude/Gas Inventories @ 11a
- U.S. market will be open all day tomorrow; note that the Japan and Korean markets will be closed tomorrow and the Uk, France, and Hong Kong will have a half day

Very Happy to Join This Game!

Spike in Fear Index Not So Fearful?

There has been a lot of talk around the VIX ever since the “fear index” closed up 6.6% right before the markets closed for Christmas Eve (on the 23rd of December, last Thursday).  Couple this move higher with the broader market closing down (albeit small) for the first time in a while and we get talking heads directing their attention to the VIX.

VIX Daily Chart

To recap, the VIX index was up 6.6% on Thursday the 23rd and up 7.3% on Monday.  Two consecutive days of strength is not a frequent occurrence.  For instance, the VIX has closed up more than 6.5% two days in a row 37 times since January 2000, or in other words, about 1.3% of the time since then.  Below displays what is likely to occur in the S&P in the subsequent 5, 10, and 20 days when the VIX closes up over 6.5% for two consecutive sessions:

Spike in the VIX

The so called “fear index” appears to not have such a worrisome effect on the broader market after all.  The odds slightly favor the market moving higher in the next 5, 10, and 20 days.  The odds of the market closing down more than just 50bps are no more than 30% for any of the three time frames.  The average and median returns point to the upside as well, although averages are not all that valuable to look at for these types of studies as they may be skewed and paint an inaccurate picture.

I would like to expand on this study to incorporate other market factors.  This preliminary analysis does not yield any actionable trading strategies so I will be looking to see if I can include another factor into the model presented here.