The Week Ahead Highlights from December 2010

 Notes for the week of December 27, 2010

All quiet on the western front. There are no strong seasonals in major indexes/ETFs right now. None of the price charts interested me, with the exception of the Russell-2000, which seems to be on a deliberate climb upwards. The Russell-2000 is a good collection of small-cap stocks. But the Russell-2000's seasonal chart, for the next several weeks, isn't strong enough to make me bet the farm on. Next week will be a good time to look more closely at the market and the seasonal patterns.

 Notes for the week of December 20, 2010

In my notes for November 15, 2010, I displayed a weekly chart of the NASDAQ Composite. I marked rather regular short-term cycle highs, occurring about every 3 months. I suggested the market, or at least the NASDAQ Composite, may be due for another short-term high if the pattern continued. I marked a momentary high in the most recent month, and labeled it 'top due?'.

It appears that was a short-term peak and can be considered another right-on-time cycle high. Notice the Composite didn't pull back much this time. When that happens, it often points out that the market is stronger than usual, and may soon take another significant step up. I see no reason not to expect another march towards a new cycle peak, around 2 months from now.

chart courtesy of Worden − www.Worden.com

There are no strong seasonals in any of the major indexes/ETFs we follow.

XLF, the financial sector ETF, is still in a lethargic sideways trading range. Strong market advances are often lead by invigorated financials. Right now, they are having a siesta.

Contrary to the oft-hyped 'Santa Claus rally', which Wikipedia defines as "A Santa Claus rally is a rise in stock prices in the month of December, generally seen over the final week of trading prior to the new year.", there really isn't much evidence to back it up in the seasonal charts for the next several weeks.

Let's look at the Q's - the ETF based on the NASDAQ-100 ("The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies." - NASDAQ.com). So any significant seasonal, such as a 'Santa Claus rally', should be apparent here, right?

Well, it is, but it's not very convincing:

Over the next 5 weeks from this coming Monday, the Q's have gone up an average of 3.7%, rising 14 out of 20 years. This is only a 70% rate, not the sign of a strong seasonal. Also of note is the variability of each year's results. A final note is that of the past 10 years, 6 were losers.

The next couple weeks should be quiet. Watch existing positions closely, but be conservative taking new positions.

 Notes for the week of December 13, 2010

The Technology Select Sector SPDR (XLK) shows a strong negative seasonal, falling an average of 3.6% over the next 7 weeks. Losses occurred in 10 out of 11 years of the XLK's history. Eleven years isn't quite enough time to place a strong confidence in the historical results. So let's look closer at some of the top individual stock holdings of the XLK ETF. All of them have longer histories than the XLK, giving us more insight.

AAPL has 26 years of history. The StockQuirks Historical Weekly chart of AAPL shows a steadily rising graph over the next 20-some weeks. At first, this looks like a good upward-bias seasonal. Focusing on the 7-week period, the same where XLK showed a drop in 10 out of 11 years, AAPL shows gains in only 15 out of the past 26 years (58%):

But notice the last 11 years, from 1999 through 2009. AAPL actually had a higher rate of declines in the past 11 years, falling 7 of those years. And in the past 5 years, AAPL has fallen every year. AAPL is the top holding in XLK. It's making more sense now.

How about other top XLK holdings? MSFT has fallen 6 out of 11 years, IBM 5 out of 11, and T a noticeable 8 out of 11 years. In the past decade, there's been a stronger tendency for top-name tech stocks to fall over the next 2 months.

This discrepancy between AAPL and the sector ETF whose largest holding is AAPL alerted me to the fact that while the 26-year AAPL seasonal may have initially looked good, the trading in AAPL, and possibly other tech stocks, may have changed in recent years. Sure enough, it had.

The best use of seasonals comes when you can find a rational market or economy-based explanation of recent changes to a stock or sector. In the years prior to the mid-2000's, AAPL was more of a computer company. While its sales of MAC's may have increased around the holidays, it still mostly sold rather expensive computers.

Since the mid-2000's, AAPL has turned to more of a gadget company, and more recently into a media company. $199 iPhones, $49 iPod shuffles, and $9 iTunes downloads will generate much more profit, and stock expectations, than $1999 iMac computers. At the end of the holiday season, traders may be more inclined to take profits, and wait until January profits are announced. With such inflated expectations built into the stock nowadays, there probably are times where the stock will fall sharply if earnings, while very good, don't meet the expectations.

Sure enough, the Response to Earnings Announcement chart on our AAPL analysis page shows that while AAPL has had good rises in response to most earnings announcements, there have been some sharp recent drops. One example:

chart courtesy of Worden − www.Worden.com

Earnings were announced after the market close of 1/22/08. Guess which day was 1/22/08. AAPL fell 25% from 10 days before the announcement, to 2 days after.

Keep this in mind for other tech stocks. The next several weeks, up until the next earnings announcements starting in late January, may display sharp swings as holiday-sales expectations give way to year-end profit-taking.

 Notes for the week of December 6, 2010

Gold has continued it's upward march. XAU, the World Gold price, doesn't show any notable seasonal bias for the next few months. GLD, the popular Gold ETF, shows a near-9% average rise over the next 12 weeks, with gains in 4 out of the 6 years. But with only has 6 years of history, that isn't anything to trade on.

It's a little too soon for the energy seasonals to come into play, at least not the indexes and popular ETFs. Certain individual stocks can have good seasonals though.

The market news during the last week often focused on retail, as Thanksgiving marked the start of the holiday season. The retail ETF, RTH, however, doesn't show much historical bias for a move in either direction. The financial ETF, XLF, shows a downward bias over the next 3 months, but it's not strong enough to trade.

Our members section focuses on individual stocks. The weekly Focus List presents screened selections with good seasonals, evidence of accumulation/distribution, and more. Some interesting candidates showed up this week. One has a very nice looking chart, a steady riser. It sports a history of rising an average 15% over the next 10 weeks (gains in 82% of the years).

Another, an energy stock, has a history of an average 8% gain over the next 7 weeks. The losses in the only two years it didn't go up during that period were -1.3% and -5.2%. It shows strong accumulation, and it's historical volatility is near the 1-yr low, making long option purchases attractive.

As usual, there are good individual trade candidates even when there's a weak seasonal picture for the indexes and ETFs.