DJIA 10500 Line in Sand

Fear not this early December weakness, it is quite customary. The first half of December has been prone to flat and negative seasonality as annual tax-loss selling and yearend profit taking intensify ahead of triple witching and the holidays. We once again find solace in the market's continuing return to historical seasonal patterns.


After the Dow recorded its "best" Worst Six Months (May-October) since 1958 with an 18.9% gain in 2009 -- its first double-digit WSM gain since 2003, normal seasonal market behavior returned. Normally, weak September was strong, but the week after triple witching was typically negative. Then we had our perennial bout of Octoberphobia as stock prices retreated in October, followed by a customary return to bullishness in November, especially ahead of Thanksgiving. Then December began on its usual positive note before heading lower over the past week.


Seasonal evidence is beginning to accumulate of underlying economic and market health. We have several seasonal indicators on the horizon that will provide better insight: The Santa Claus Rally, January's First Five Days and The January Barometer. As triple witching day approaches on December 18 market strength should resume. If not, we will begin to get more cautious as the market's momemtum could be waning. As our seasonal indicators register technical readings will become crucial.


In the graph below, the Dow's struggle to break through 10500 with gusto is concerning (1). This sideways action has created a tight range from about 10200-10500 intraday and put the Sell-Side MACD into a bearish cross (2). But if the Dow can bounce off its 50-day moving average (black line) as its has since July, we would expect the rally to recharge and finally blast through 10500 and achieve more substantial new recovery highs in the 11000-12000 range before this bull is put out to pasture some time in the early part of 2010.

Click image big graph...