Pullbacks, Indicators, Barometers, and Fear

So most know we took one of our South Florida speaking tours last week. Such tours consist of meeting with portfolio managers, presentations to clients of Raymond James, branch visits with our financial advisors, doing the media thing, well you get the idea. To all of those emailers/callers we were unable to respond to – apologies – but, the fact of the matter is we were doing five or six events a day, interspersed with a massive amount of phone calls, and then drive to the next event. While there were many questions about the bond/stock/commodity markets, the economy, earnings, etc., by far the most questions were about the December Low Indicator, because we broke below the December low last week. Recall, we brought this indicator to the attention of Jeff and Yale Hirsch decades ago and they have published it in The Stock Trader’s Almanac ever since. Since then it has been quoted by many Wall Street pundits, yet Lucien Hooper’s December Low Indicator would likely have been lost if not scribed by us a long, long time ago. We like this story:

It was back in the early 1970s, when I was working on Wall Street that I encountered Lucien. At that time Lucien, then in his 70s, was considered one of the savviest “players” in this business. While known for many market axioms and insights, the one that stuck with me was Lucien’s “December Low Indicator.” It seems like only yesterday we were sitting at Harry’s at the Amex Bar & Grill having lunch when he explained it. “Jeff,” he began, “Forget all the noise you hear about the January barometer; pay much more attention to the December low. That would be the lowest closing price for the Dow Jones during the month of December. If that low is violated during the first quarter of the New Year, watch out!”

Now the track record of Lucien’s indicator over the past 50 years is pretty good, especially when taken in concert with the January Barometer (“So goes the month of January so goes the year”). In the more recent history, however, Andrew Adam’s comments of last Friday are worth repeating. To wit:

One potential red flag, however, is that that the Dow Jones Industrial Average did close below its December closing low of 24410 to give us violation of the "December Low Indicator" we referenced last month. . . . The last time it happened was only two years ago back in 2016, though the situation was very different considering January 2016 began almost right where the December 2015 low sat, and the Dow ended up closing beneath it on the third trading day of the year. That, of course, culminated in the January/February correction that ended on February 11 and saw the Dow ultimately fall about 14% from its previous trading high of early November 2015. After that, though, the market went almost straight up to finish the year comfortably higher. Overall, the December Low Indicator has a rather mixed history going back to 2000. It is actually not uncommon at all to get a violation, with 12 occurrences since 2000, and the forward returns have been surprisingly encouraging. From the point of the December low being broken, the Dow was up after three months 8 out of 12 times, up after six months 7 out of 12 times, and up after 12 months 9 out of 12 times. So, while it does bear watching, we don't think the indicator, by itself, is enough to be overly concerned about, especially with stocks already near downside extremes.

Speaking to “downside extremes,” the envisioned February Flop came three sessions before our February 1 target, but it was within the +/- three-session window our models allow. Subsequently, we got the anticipated selling climax last Tuesday, as related on CNBC that day. Then, as is the typical pattern, the indices experienced a sharp throwback rally that we chatted about on that same CNBC appearance and said that it should fail, with the indices sliding to lower lows. “The textbook chart pattern,” we said, “would be for an undercut low of Tuesday’s selling climax low.” Well, that’s pretty much what has happened. What we find interesting is that pundits that NEVER saw this decline coming have been rushing out over the past few weeks touting various support levels; you pick the index, as well as their various stock buy ideas, all of which are pretty worthless until the equity markets exhaust themselves on the downside. Ladies and gentlemen, when the stock market gets into one of the selling stampedes, all such comments are pretty useless! So what now?