So Much for the Christmas Rally

For over a month I've been hearing the Santa Rally this and that, some blogs have been downright nasty in their opinion of anyone who is short with statements like, "Just wait until the Santa Rally comes". Thus far for the Santa Rally Seasonal period we are down thus far. Today there are about ZERO trading desks open and the bond market close at 2 p.m., that means the machines will be running things for the last two hours of the day, I wouldn't read much in to that (machines in charge, no bond market open and extraordinarily low volume= nonsense).

The main point is that because something has a long track record of probability does not mean you should take that event out of the current context and assume it s a given. The current context is the economy the world over, (today Japan as I was starting to suspect, used $9 billion in the F_E_D's swap line showing Japanese banks are in the middle of a liquidity squeeze as well-borrowing from the swap line is akin to putting a target on your back for the short sellers, they know the bank has funding problems) is in huge trouble like never seen before.

Now the talk is of the 1st trading day of the year ramp, true we saw it at the start of this year as funds and trading desks came back online, it looked like this.

 A nice ramp job... However as I have mentioned in the past, during my nearly 4 years of teaching Tehnical Analysis to beginners and intermediate students, I strived to get them to understand that charts were not most useful for resistance and support areas or indicator readings, charts were most useful as an expression of the two things that drive the market, both are human emotion and they are fear and greed. The Japanese understood this centuries ago when they created Candlestick charting to trade rice, candlestick charts are a visual representation of human emotion and even with machines in the market, they are still programmed by humans. This is why the market has so many repeating patterns over centuries of history, human emotion doesn't change. So, not to say a New Year ramp s not possible, after all a Santa Rally was possible, but a my Sunday video showed, not likely, I think it's only reasonable to put that first trading day of the New Year in to context.

This chart covers the first day of 2010, no one knew what would happen after like we do now, they knew only what had already occurred and QE 1 was still in effect. Looking at this chart, what emotions do you think carried the market? Fear? Trepidation? Confidence? Greed? I think the last two are more appropriate then the first two. The market was in a season in which many believed a new bull market had started, they had no idea that Europe was going to implode, that China was actually really going to slow down, the inflation effects of QE had not been felt, there was little reason to be skeptical of the F_E_D's intervention, we had not seen negative effects back then.

Fast forward....

What emotions do this period convey? Greed? Confidence? Trepidation? Fear? I would say Trepidation, a little fear, some denial, and probably some desperate hope.

Structurally in the market things have changed as well. Here's commentary from ZH on this week's flow of funds report:

At this point the weekly ICI fund flow update, showing the barrage of redemption requests no matter what the market does, is a moot point, but we will do it anyway: in the week ended December 21, when the market was doing its usual Santa rally antigravitational acrobatics and rising on the now denied hope that the European LTRO would be the Hail Mary pass of 2011, investors in domestic equity mutual fundspulled another $2.7 billion, leaving funds with even less dry powder, with even less ability to lever up, and with an even lower margin of error to any sharp pull backs in stocks. To date, and with just one week left in, investors have withdrawn a whopping $135 billion from equity mutual funds, which we are 100% certain is an all time record for any year in which the S&P closed even nominally positive for the year, proving that nobody believes this farce known as a market any longer. But we all know that... In further detail, investors withdrew funds for 34 of 35 consecutive weeks, have withdrawn $19 billion in the past month alone, and their flows show no indication of any sort of market correlation any longer, indicating that no matter how high the "powers that be" push stocks, retail no longer cares, and will not chase "performance" especially when said performance is 100% fraud and manipulation.

And so the Mutual funds are left with much less money as well as the hedge funds to operate. It may be time for a more defensive posture. You must understand that the weekly flow of funds is not just a number, it's showing a crashing business model and a number of funds are being forced to close shop. Layoffs are hitting Wall Street hard recently. Think about the emotions there as a desk trader, as a fund manager, these are the very emotions that move markets and now it is self preservation time. No one wants to lose that 6, 7, 8 or even 9 figure income, but this is no longer the season of funds, mutual or hedge, they went from vogue to plague and the fall from glory was fast. We can't ignore these things moving forward.

Finally look at the 2008 New Year.

 Not such a great start.

Here's the period preceding it and yes, there were rallies shortly before the new year, but the overall picture conveys what emotions? I'll leave that to you.

The point is no seasonal probability can be judged in a vacuum.