Seasonalties: Decembers are usually mildly bullish

By James Dines
The Dines Letter

       Dow-Jones Industrials: Checking all Dow Decembers since 1950, our Research Department learned that 39 had risen, 15 declined, for a bullish track record of 72%. December is the second best-performing month for the S&P 500 and the Dow in terms of average percentage changes. While the number of advancing Decembers is more than 2-1/2 times the retreaters for the Dow, extreme movements have been rare. The overall impression of Decembers is one of the churning neutrality, probably because of the buffeting cross-currents created by tax-motivated buying and selling. Actually, there often tends to be a rally Top in November, followed by early-December weakness and then late-December rallies, for net-neutral action. Since 1950 there have been only nine Decembers with rises exceeding 5%: 1956, 1970, 1971, 1976, 1985, 1987, 1991, 1999, and 2003 (about one out of six). December 2002 stands as the only December with a decline in excess of 4.2%. Decembers "Modulate," as we call the transition, in preparation for the important changes due at the start of every new year.
       Popularly known as the "Santa Claus Rally," a short and sweet rally for
traders has been observed in the S&P 500 during the final five trading days of the year, plus the first two in January (this year from 27 Dec 04 until 4 Jan 05). The average rally for the past 35 years was 1.72% as of Jan 04.
       We credit Bob Stovall with having conducted a seasonality study on year-end rallies since World War II. His basis for calculating a year-end rally begins with the low DJIA close in November or December and ends with the high DJIA close in December or January. From November of 1945 to January 1985, his study found that year-end rallies ranged from between a low of 0.9% in 1968 and a high of 22.2% in 1974. Our Research Department has continued updating Bob's average every year since then and, as of 2004, this 59-year average had not varied much, at 9.87%. Actual year-end rallies from 1988-03 have been: 8.87%, 8.83%, 11.94%, 14.25%, 4.39%, 8.62%, 6.99%, 13.17%, 14.31%, 10.11%, 10.89%, 10.79%, 7.2%, 14.3%, 6.5%, and 11.3%. Thus, assuming that the 2 Nov 2004 low at 10,035 holds, a projected rally toward around the 11,026 area is indicated between December 2004 and January 2005.
       Taking the fourth quarter as a whole, historical records show it outperforming all the other quarters, having posted gains for the Dow in 60 out of 84 years, or 71.4% of the time, as against 59% for the other three quarters. The fourth quarter gains averaged 2.79% as compared to 1.61%, 1.85% and 1.29% for the first three quarters. Focusing on more recent times, an impressive 5.3% gain in the S&P 500 has occurred over the past 24 years. Twenty years were winners (83.3%) and only four were losers. If the S&P 500 rose by 5.3%, it would theoretically reach 1174 by the end of 2004, which might be a conservative estimate considering it already stood at 1184 on 12 Nov 04. Beginning our DJI count in 1988 (after the 1987 market smash) fourth-quarter rallies averaged 6.6%, with only 2 downers in 16 years, up 88% of the time. Likewise a projected price of 10,745 for the year 2004 might be too conservative considering it was already up to 10,550 on 15 Nov 04.
       Gold: Counting the last 35 Decembers the Dines Gold Stock Average (DIGSA) reveals no useful Seasonality, having risen 18 times and declined 17 times (neutral once). The Dines Silver Stock Average (DISSA) rose 16 times, declined 19 times, for a slightly negative seasonal environment (54% of the time). However, based on Dinesism #9 (the Dines Rule of Gold Seasonality, DIRGS), the first quarter is seasonally positive for gold and silver stocks, so purchases made on weakness during Novembers and Decembers usually work out profitably, based on Seasonalities alone, other things being equal - which of course they never are.
       Editor's Note: James Dines is editor of The Dines Letter, P.O. Box 22, Belvedere, CA 94920, 1 year, 17 issues, $195. Visit the web site at www.dinesletter.com.