Winning: Monthly market timing, gold rally, pairs trade picks & Gartman’s gold call

June 28, 2018 08:00 AM
Tracking Stock

Santa came early,  December 2017  

Each month in our calendar section we provide an outlook on how the major equity indexes behave in that particular month along with the dates of the important economic reports released that month. We try and dig a little deeper in examining monthly performance to extract trends. In the December issue, while noting the typical strong performance of equities in December, we discovered that in years where equity indexes performed extremely well, they did not outperform in December. If anything, they underperformed. 

The “Santa Claus Rally” is a long-established market phenomenon that is often attributed to end-of-the-year window dressing where portfolio managers buy stocks that performed well during the previous 11 months so that they can claim it in their portfolio. Perhaps in years where the broad market does well, there is less of a need for window dressing. This appears to be the case last December as the S&P 500 returned slightly less than 1%, well below its average (since 1950) of 1.62%. The Nasdaq Composite returned less than 0.5%, well of its December average of 1.84%. The Dow 30 slightly outperformed its average. 


Monthly index arb, January 2018  

The following month we reported on how the Nasdaq Composite Index, which is heavily weighted in technology and Internet stocks, had vastly outperformed the other stock indexes in January. In fact, the Nasdaq average January performance, 2.55%, was more than double that of the S&P 500, 0.94%, and triple that of the Dow. Given this anomaly, we suggested either a pairs trade or overweighting tech stocks. This January that tendency held up, although not as significantly as the historical averages. The Nasdaq was up 508.09 points, roughly 7.3%, while the S&P 500 was up 150.2 points, roughly 5.6%. The Dow was up about 5.5% (see “Index arbitrage,” below). 

Golden bull 

Dennis Gartman provided a bullish outlook on gold in the December 2017 issue as well as a road map on how to approach it. While gold did break through the $1,260 per oz. support area Gartman cited, he provided a roadmap on trading it. Gartman said that gold rallies typically retrace between 50% and 61.8% before resuming. “Golden opportunity” (right) illustrates this tendency as gold retraced 50% from its move from the December 2016 low to the July 2017 high. This opportunity was created in December and led to a $119 move. The chart also illustrates Gartman’s point as there were two shorter-term buying opportunities based off of the December 2016 low. 

He also recommended getting long gold through the euro or Japanese yen, both of which have rallied sharply against the U.S. dollar since December.  

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.