The Dines Letter
By James Dines
Dow-Jones Industrials: Checking all Dow Decembers since 1950, our Research Department discovered that 41 had risen, 16 declined, for a bullish track record of 72%. December is the second best performing month for the Dow and the S&P 500 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. Our overall impression of Decembers is one of churning neutrality, perhaps because of the buffeting cross-currents created by tax-motivated buying and selling, or Holiday pixillation. 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 Decembers). December 2002 stands as the only December with a decline in excess of 4.2%. Decembers "Modulate," as we call such transitions, in preparation for important changes due at the start of every new year, often offering subtle clues.
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 24 Dec 07 until 3 Jan 08). The average rally for the past 38 years was 1.56%, as of Jan 07.
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 2007, this 62-year average had not varied much, at 9.71%. Actual year-end rallies from 1988-2006 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%, 11.3%, 8.2%, 6.1% and 5.3%. Thus, assuming that the 2 Nov 07 low at 13,042.70 holds, a projected rally toward around the 14,309 area is indicated between 1 Dec 07 to 31 Jan 08.
Taking the fourth quarter as a whole, historical records show it outperforming all the other quarters, having posted gains for the Dow in 63 out of 86 years, or 73% of the time, as against 59% for the other three quarters. The fourth quarter averaged 2.86% as compared to 1.55%, 1.86%, and 1.37% 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 27 years. Twenty-three years were winners (85%) and only four were losers. If the S&P 500 rose by 5.3%, it would theoretically be around 1,608 by the end of 2007. Beginning our DJI count in 1988 (after the 1987 market smash) fourth-quarter rallies averaged 6.1%, with only 2 downers in 19 years, up 89% of the time. This projects the DJI at 14,743 for the year 2007. Those are the cold statistical percentages to play.
Gold: Counting the last 39 Decembers, the Dines Gold Stock Average (DIGSA) reveals no useful Seasonality, having risen 20 times and declined 18 times (natural once). The Dines Silver Stock Average (DISSA) rose 19 times, declined 19 times, again not a useful percentage for TDLrs to play. However, based On Dinesism #9 (the Dines Rule of Gold Seasonality, DIRGS), the first quarter is seasonally positive for gold and silver stocks, no 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 94929, 1 year, 14 issues, $295. www.dinesletter.com.
