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.
