The Dow Jones Industrial Average (DJIA) dropped for the fourth trading day in a row on Monday, falling 0.7% to close at 8519.69. The average is down 0.52% over the last five trading days, up 5.9% over the last month, and down 36.7% over the last year.
This is normally a bullish time for stocks in general. Click here to see the bullish seasonal tendency in our SeasonalEdge analysis tool, which shows that the Dow has a 75% chance of rallying (85 times in 113 years of history) by an average of 2.1% over the twelve trading days following December 22nd.
However, there's a historical tendency to fall after four successive drops in the month of December.
Q: How has the Dow, S&P 500 index (SPX) and Nasdaq (NASD) performed in the past when it has seen four successive days of decline in the month of December?
A: The very next day after the event (today) the Dow has declined in 75% of the cases (6 of 8) by an average of 2.4%. The average of the two rallies is 1.4%. The overall average return on the day following four successive declines in December is
-1.4%, which projects to about a 120 point drop.
Looking further out, though, the decline has been a good time to buy: according to the eight previous occurrences of this event, the DJIA.A has shown a very strong bullish edge that peaks 18 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Monday, Dec. 22, 2008) is Tuesday, Jan. 20, 2009. The Dow rallies in 100% of the cases (8 of 8) by an average of 6.0% relative to the close on the event date. The overall return of the eight cases is 6.0%, which, based on the close of Dow on the event date (8519.69), provides a target price of 9030.87.
The SPX declines in all six historical cases the next day by an average of 2.3%. Following that decline, the SPX has shown a very strong bullish edge that peaks 21 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date is Friday, Jan. 23, 2009. SPX rallies in 100% of the cases (5 of 5) by an average of 4.7% relative to the close on the event date. The overall return of the five cases is 4.7%, which, based on the close of SPX on the event date (871.63), provides a target price of 912.6.
There's only one instance in the history of the Nasdaq of this event. It fell 2.0% the next day, and rallied 2.8% by 21 days later.
Anthony Kolton is president of Logical Information Machines and Markethistory.com, Inc.
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