Saturday 5 January 2013

Official End of Santa Rally

Santa Rally officially consists of last five trading days of December and first two trading days of January. It seems this year, Santa's elves and reindeer gang were on strike and Santa was late in coming to Wall St.
Santa was hanging near the cliff and somehow made peace and arrived just in the nick of time. Now that we have the end of Santa Rally, SPX is up 1.5% during this period. During this period we have also seen back to back accumulation days which A/D ratio at 17:1 and 12:1. Very robust to say the least. Consider this, SPX is 14% higher today than it was at this time last year. And still we want to make money shorting the market?

Next we need to see the 1st five trading days of January and we want them to be positive.

Does anyone remember last January? The market kept grinding up and up till March and everyone kept shorting the market till there were no bears in town. I suspect this year we will have a repeat because already  I am hearing about folks shorting the index and talking about over bought. They forget that overbought can remain overbought for a long time. While I do expect a short term correction, I do not want to short the market because cycles have bottomed and is up for quite a while. Any correction will be an opportunity to add to the existing long positions.

It is a fool's errand to predict the future but if I have to make a guess, I would think that correction would come towards the end of next week. The market may just grind around this level for few days, consolidating and correcting in time if not in price. SPX may even target 1475 before correcting back to 1450 level for the next upward journey.

I am yet to see anyone who is happy about 2012. The beginning of the year was a wash for TA enthusiasts who kept calling for corrections day after day. The 2nd half was a massive meat grinder with chops and whipsaws. Almost all of Wall St. got 2012 market calls wrong :

Coming back to Friday's market action, the most notable thing was the collapse of VIX.

This is a weekly chart and as you can see VIX has not been so low since 2007. If you remember my last post (only few days back) I wrote that I expect VIX to reach in low double figure and we still have 3 more points to go before we reach bottom.  And no, I am not going to buy UVXY or TVX even if VIX goes up a little by middle of January, because the dominant cycle for VIX is pointing down. I would never trade against cycles, even if I have to give up some trades or profits because I believe in "safety first".

So how was your market return in 2012? I want to share an article written by Phil Pearlman, executive director and investor of Stocktwits: Successful market participation is a gruelling process, a marathon. There are so many components and it is such a complex challenge that you must spend years improving while facing serious stress and financial setbacks. You will need to master multiple skills and it will take time.
For 2013, you will not need to or  be able to conquer it all.
Instead, choose one critical aspect of this craft to improve on and then make it your mission to crush that one thing.
For some of you, this will mean risk management but it may be something else like managing trades once you are in them or trade selection.
But whatever you choose, that one important thing, devour it, become it, crush it…
Focus on that one thing with religious fervor. Learn everything you can, seek guidance from those who have been successful, read about it everywhere, consume yourself in it, think about it when you should be doing other things and cultivate your own process.
Then practice practice practice that one thing you will improve in your trading until it becomes so automatic and so much a part of your routine that you do it every single solitary time as a function of habit.
Very Prophetic! For my part, I am working on risk management and preservation of capital. What is your goal for 2013?

We have scaled in our positions and will add more on weakness. I think Gold and Gold Miners have made a bottom. Although I have not taken any position in GDX, I thought it would be interesting to share this chart of gold miners with you:
(H/T: Arthur Hill, Stock

Seasonality also favours the PM sector.

That's all for this weekend. Thank you for reading the blog. Please forward it to your friends who may like it. I look forward to your comments and suggestions.


  1. Thanks for you insights BB. I had looked at all the $BPxxx this weekend and had observed that $BPGDX was pretty low and has been flat lining.

    Along the lines of focusing on one thing I agree. I read something last weekend about doing more of the things that you have been successful with and avoiding those things that were not successful. So I've analyzed last years trades and intend to focus on the types that were the successful ones.

    Here's to a prosperous 2013 and beyond.

    1. To critically analyse self and correct the mistakes is the most important and yet difficult task we all face.
      Best of luck with the trades in 2013.