My article comes out on Christmas day, which will be followed by an expected “Santa Claus Rally” in the stock market.
The “Santa Claus Rally”, which usually happens between the Christmas and New Year holidays— is closely watched as it is supposed to provide a glimpse of how the market will perform in the coming year.
I’m not quite clear about the reasons behind this principle except that this added period may provide further insight into the market’s outlook for the New Year.
Much as I would like to subscribe to this interesting method, I’m a more traditional person and I prefer to use the conventional method of taking a look at the past to find out what the future holds.
As pointed out in an Asian saying, “the future is but a continuation of the past.”
The past 12 months
The market since the start of the year—in other words, on a year-to-date basis—has gone up by as much as 33.21 percent, from 4,371.96 to 5,823.94 at the close of trading last Friday, December 21.
The market is even slightly higher on a yearly basis. With a beginning index level of 4,368.88, it is also up now by as much as 33.31 percent.
Looking at its chart pattern, therefore, the market has been on an uptrend since the beginning of the year.
Its every advance, however, was met with several big and small pullbacks that one may be led to think that the overall movement this year is similar to that seen in 2011.
Notably, the market in 2011 started with advances.
It drifted sideways to lower in the middle part to end the year with a measly net gain of 172.65 points, equivalent to a net advance of 4.11 percent only.
Such performance pales in comparison with the market’s movement in 2009 and 2010.
In 2009, the market advanced by as much as 1,151 points or 61.48 percent. The market gained another 1,174.98 points or 38.85 percent in 2010.
Remarkably, too, the market this year started out quite strong. It steadily climbed until it hit something of a snag on May 4.
At the time, the market established a new record high at 5,297.55. This was about 925.59 points or 21.17 percent higher than the level seen at the start of the year.
As can be observed, the climb was also relentless. It was met with small pullbacks that these did not last long, thus the market appeared to be on a winning streak.
On May 15, though, the market fell to its lowest below the 5,000 index level at 4,879.42. It attempted to climb back but barely managed to go past 5,000.
Such pattern persisted—the market was unable to break through the 5,000 index level. On June 4, the market hit another low, dropping below the 5,000 mark to settle at 4,890.20.
The market tried to recover but once more fell below 5,000 on June 15 as it hit 4,920.63. That was the last time, however, that the market fell below 5,000.
While these were happening, I wrote an article about the market’s episode and referred to the 5,000 index level as its “Maginot’s Line.”
The Maginot line was originally “the system of fortifications made along the eastern frontier of France and considered impregnable. It was named after the French minister of war Andre Maginot who directed its construction.”
Incidentally, it was later rendered useless by German forces.
Today, it is used to refer to a seemingly insurmountable barrier. In this connection, I made a fearless forecast about the 5,000 index level that like the real Maginot line, it will fail in the end.
The market finally broke out from the 5,000 index level on July 5 when it hit another record high at 5,369.98.
While the market never fell again below 5,000 after that, what happened next was déjà vu. The market slipped up to the first 10 days of September.
By the first week of October, however, the market started to show signs of a strong advance. It finally took off on Nov. 19 with another record high at 5,439.21.
Records have continued to be made since then. The market was reported to have set at least 32 highs for the year.
Bottom line spin
To summarize, the market has been on the upswing since 2009. The market of 2009 and 2010 produced a record-breaking two-year market advance amounting to 2,326.46 points or 100.33 percent. This meant that without any extraordinary effort or imagination to trade, you made a 100 percent return on your investment.
In 2011, despite a nice start that seemingly indicated another very aggressive year, the market managed only to realize a net advance of 172.65 points or 4.11 percent.
It was a far cry from the market of 2009 and 2010. Nonetheless, it was still on the uptrend.
The market’s performance, especially in 2009 and 2010, intriguingly resembled that of the pattern of the Santa Claus rallies for those years.
This prompted me to make a forecast for 2012 using the Santa Claus rally of 2011, following the principle of the forecasting method.
I was dead wrong: With the Santa Claus rally results of 2011, I predicted that the market in 2012 will “move sideways within an average market range of 10 percent.”
As you know now, the market has gone up by no less than 33.21 percent on a year-to-date basis and 33.31 percent on a yearly basis.
Simply looking at the market’s actual performance since 2009, it is pretty obvious that the market continues to be on the uptrend.
It may have experienced some slowing down in 2011 but it was still on the uptrend.
It has picked up pace in 2012 and I believe the market will be gathering more momentum in 2013.