Stock Traders' Almanac

December Low Breached

As we warned in the Pulse of the Market in the February 2010 issue on page 3, the market was ripe for fall as sentiment had been at extremely complacent levels for some time. With help from the political arena stocks turned tail last week, pushing the major averages down about 5% in three days; the biggest pullback since July. This drop was enough to cause the Dow to close below its December closing low of 10285.97 on 12/8/09., triggering the dreaded December Low Indicator (2010 STA, page 40).

Since 1950 when the December Low Indicator has triggered, the Dow has fallen an additional 10.9% on average. This was precisely the case the past two years with the Dow losing an additional 42.1% in 2008 and 17.6% in 2009 before surpassing the previous high. Excluding 2008’s drop, the largest of them, reduces the average subsequent drop to about 10% -- that would put the Dow at about 9155.

A rebound of about 24 S&P points, or 2.1%, would put the January Barometer positive for 2010. In eleven years when the December Low was breached but the JB was positive, subsequent declines were reduced to 6.0% and the years as a whole had much greater gains, averaging 8.2% versus -4.0% for years when both were negative.

Technical and seasonal warnings have been issued, sentiment has been giddy and the folks in Washington are on notice. Midterm years as we have been reminding lately are often fraught with uncertainty and market volatility. Obama presents his first State of the Union this week and Bernanke’s confirmation deadline is month end. The most prudent course of action is to refrain from major new purchases, tighten stops, take any sizable short term profits and assess the conditions at week’s end.