Did Grinch steal the rally?
It was just before Thanksgiving 2014. It should have been an ebullient time of year. Markets were already up nearly 17% year-to-date. Financial market junkies were quick to tell anyone with a wallet, that there would be a year-end rally. The December signal was a strong one, a number of folks stated, leveraging anything resembling a probability idea to buttress such claims. Adding to the recent mania, a high-tech era Stock Trader’s Almanac -known as Kensho- made its glitzy and cute debut that very few questioned. However they came out with a very definite and what would be a highly calamitous stock market call. Instead they quickly compounded and magnified the flaw in such products. On this blog, several weeks ago, we were properly cautious against such dangers of falling prey to data-mining excesses. Now we are positioned to conduct a post-mortem on the outcome of following such faulty advice, put forth by those mostly interested in getting you to make (more) specific and ongoing stock trades. Such excess trading is always to an individual’s own financial detriment (it’s perhaps amusing in the short run, but saving money over the long run should be more rewarding!) As I write this on New Year’s from Miami’s airport’s premium lounge, I can see a TSA employee walk past and purchase a couple Lottery tickets from a state-run kiosk at this international airport. I wonder how much precious earnings of this government employee (a position created as a consequence of 9/11) and that of other colleagues were being routinely dumped into that poor game of chance, further trapping them in such an inelegant position.
Returning to our main topic here, on November 25, the S&P was at its own high level of 2065. Kensho said, with misleading precision, that the typical return of the S&P (from then to year-end) was 2.2%. Or a higher market level of 2110.
Using November 25, the amount of days to year-end happens to be just about a week lengthier than that of a typical month (so about 36 calendar days). To then conform to the odd Kensho style, we looked at the previous 10 years of monthly data, standardizing each non-December “month” period to be the length of about 36 days. The number of these monthly data collected therefore is high:
10 past years *11 months = 110 historical data
And the typical return over this history was 1%. Or a market level of 2086 (1% higher than our base-line level 2065). So for our analysis, breaking above 2086 would be our bogey. Kensho also provided other frilly statistics to falsely satisfy your concern. Such as the information that by then, 10 of the past 10 years the S&P was higher during this “Santa Claus rally”, though markets as we noted above has an upward tilt, so we might expect our baseline “return” to be higher, greater than 50% of the time to begin with.
This post was published at Zero Hedge on 01/02/2015.