Monday, November 29, 2010

Waiting for Santa Claus Rally

Things look gloomy. Markets are going down. We are bombarded by bad news. Europe is falling apart, again. States are gonna default on their debts. Banks are lying about their exposure to (choose any number of) Europe, bad mortgages, bad corporate loans, bad personal loans etc.
And I am turning optimistic. There are reasons for that.

First of all, there is one obscure technical indicator: 13-day moving average. Since July of 2008 it was pretty consistent showing current trend. When one of major indices (Dow, S&P or Nasdaq composite) crossed above it and stayed this way for more than 2 days, index went up for several weeks. Same thing (with opposite sign, of course) happened when index crossed under 13-day MA. So, last Wendesday, November 24, Nasdaq composite crossed above 13-day MA. And it closed on Friday and today above this line as well. This is a bullish sign. Dow and S&P are still under 13-day moving averages. But for the last couple of years Nasdaq Composite was leading Dow and S&P.

Then let's take a closer look at current fears. Europe is not going to fall apart. They have enough money and enough will to save their economies. Yes, several countries are under attack and can't refinance current debt obligations at reasonable yields. I think we see classic bear attack coupled with media hysterics. I don't know if press is hired by bears or acts on the premise that bad news sells better than good news, probably both. But reality is that Euro zone has a big fund, more than 800 thousand Euros of emergency funding and they can double this fund without much trouble. Add to that possibility (I think necessity) of European Bank doing its version of QE, that would be enough to cover needs of every country in trouble.
States are in more precarious position. But nevertheless, state bonds are selling well, yields are not that high. And I think Uncle Sam will come to help in case of emergency. Because default of a big state would be a disaster for the whole country. I can't even think what default of California would look like.

The main reason for my optimism is seasonal. Historically last month of the year is bullish for stocks. Santa Claus rally usually comes after Black Friday. I expect it this year too. Because economy isn't that bad. Because employment picture is improving, albeit slowly. Because life is still going on, despite all the gloomy predictions in media.

Full disclosure: author has long position in SNF, which is CEF invested mostly in Spain and in CEV, which is CEF invested in California state and municipal bonds..

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