Daily Commentary - Posted on Sunday, January 1, 2012, 2:20 PM GMT +1

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Jan Sunday 1

Bullish End-of-the-Year Setups

Posting extended – see Part II (NYSE new highs at elevated levels) in the midst !

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The S&P 500 closed out the year at unchanged levels, while the SPY (S&P 500 SPDR) gained +1.89% due to its dividend payments.

The time frame between Christmas and New Year’s Day has been surprisingly weak this year – despite the fact that the S&P 500 is up 0.85% month-to-date and 11.15% quarter-to-date – , including a 90%+ up and a 90%- down (1st time) volume day (volume associated with advancing | declining issues accounting for at least 90% of NYSE total volume).

But at least with respect to historical precedents, lopsided volume days (on both sides of the market) between Christmas and New Year’s Day had significant short-term bullish implications in the past.

Table II below shows all occurrences (since 1965) and the S&P 500′ performance (cumulative returns) over the course of the then following four sessions in the event one went long on close of a session where the S&P 500 had posted a 70%+ up or down volume day during the last three sessions of a year (16 occurrences up to now, in 14 years). The signal had already been (successfully) triggered on Wednesday, December 28, 2011.

Up to now, the S&P 500 shows a faultless track record of 16 higher (one unchanged) closes out of 16 occurrences two days later, calling for a ≥ +0.45% up day on Tuesday, January 3, the first session of the year. And although probabilities and odds for a higher close three and four days later are decreasing (but still  3 : 1 and 2 : 1 respectively), downside potential had always been limited (max. downside -1.28% over the course of the then following four sessions), indicating a low probability of significantly lower prices until Friday, January 6, 2012 (the S&P 500 is already down -0.43% since the signal had been triggered last Thursday).

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Part II NEW

A second (bullish) setup had been triggered on Friday, December 30, 2011 as well.

On Tuesday, December 27, 213 stocks out of a total of 3118 issues listed on the NYSE closed at a fresh 52-week high, a remarkably high percentage of 6.83%, at the same time a (percentage-wise) 120 day high. The 5-day and 10-day (rolling) moving averages of the percentage of NYSE issues closing at a fresh 52-week high are currently running at elevated levels as well, closing at 4.78% (5-day) and 4.29% (10-day) on Friday, December 30, 2011, the latter representing a 6-months high.

Table II below shows all occurrences (since 1965) and the S&P 500′ performance (cumulative returns) over the course of the then following five sessions in the event the 5-day and 10-day (rolling) moving averages of the percentage of NYSE issues closing at a fresh 52-week high were both reported above the 4.0% threshold (for the first time) between Christmas and New Year’s Day (between the 26th and 31st of December).

The S&P 500 closed at a higher level one to five sessions later (in this event until Monday, January 9, 2012) on 11 (13) out of 14 occurrences, and always posted at least one higher close four days later at the latest. In addition, downside potential had always been limited: the $SPX never closed lower 1.0%+ five sessions later, but up 1.0%+ on 8 occurrences.

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And last but not least:

Although the S&P 500 is up 0.85% month-to-date and 11.15% quarter-to-date on December 30, 2011, the index performed poorly during the period between Christmas and New Year’s Day.

Table III below shows all occurrences (since 1930) and the S&P 500′ performance (cumulative returns) over the course of the then following four sessions, until the end of the then following week and until the 3rd Friday of January (OpEx since 1974) in the event the S&P 500 had been up month-to-date or up  ≥ +4.50% quarter -to-date (in order to get a statistically significant sample size) on the final session of December, but posted a negative performance between Christmas and New Year’s Day (long on close of the session immediately preceding Christmas Day, until the close of the last session of the year).

The S&P 500 closed at a higher level at all those points in time on 11 (12) out of 14 occurrences. In addition, downside potential had always been limited: the $SPX closed lower 1.0%+ on the end of the then following week on 2 occurrences only (on all other points in time listed below on 1 occurrence only), but up 1.0%+ on 11 or more occurrences.

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Conclusion(s)

When the markets showed a strong performance during the month(s) preceding New Year’s Day, but performed poorly between Christmas Day and the end of the year, or posted a 70%+ lopsided volume day on any side of the market during the last three sessions of a year, or NYSE new highs were running at elevated levels, the S&P 500 showed a strong tendency to continue moving higher right at the start of the new year, indicating that the short- and intermediate-term trend will be (remain) up.

Have a profitable week, and I wish you a Happy New Year !

Frank


Disclosure: No position in the securities mentioned in this post at time of writing.

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Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets). Index data (e.g. S&P 500 cash index) does not account for dividend and cash payments.

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Disclaimer

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

(Data courtesy of MetaStock and Pinnacle Data Corp., and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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