On Monday I sent out the first Essentials of Trading email newsletter to subscribers. If you aren’t already on that list, I encourage you to sign-up here. Here’s some of what I included in that initial mailing:
I’m a bit concerned with the action in the markets last week. The period around Thanksgiving is traditionally a positive one for stocks. I was talking with a colleague of mine on Monday. We were both of a mind to use the early weakness that day as an opportunity to get long the S&P 500 (or whatever), and by extension to look for Treasury yields to rise and the dollar to fall. There was a bit of a reversal after the original sell-off, but that ended up being it, and the pattern never improved throughout the rest of week, even on Friday.
I bring this up because when traditional seasonal patterns don’t work out it tells you there are things going on that are overwhelming them. That means we have to look deeper at what’s driving the markets when thinking in fundamental terms and to make sure we are reflecting these developments in our technical analysis.
All of this might not be such a big deal at other times of year, but in and around year-end there are a lot of seasonal patterns at work. Tax loss selling and Santa Claus rallies get talked about by the folks on CNBC and the like, but there are very strong patterns in the forex market this time of year as well (see Opportunities in Forex Calendar Trading Patterns).
Because of thin holiday volumes, trading this time of year always has the potential for quick, sharp moves. With the standard seasonal patterns looking like they may not hold (though I do suspect tax loss selling will still be prevalent), there is the distinct risk of greater than usual volatility. Make sure you’re factoring that into your risk and position-sizing decisions in the weeks to come.
If you would like to get more stuff like that on a weekly basis, I encourage you to sign-up today so you can get the next edition due out on Monday.