When the Value Line futures used to trade, there was a well known seasonal spread that involved buying Value Line Futures and shorting the SPs (proper ratio) the last two weeks of the year into the first two weeks of the new year. Small caps tend to outperform the big cap blue chips during this window. Some of the original reasons given for this distortion were along the lines of tax loss selling, locking in of capital gains, etc. It was shown that a significant percentage of gains in small caps came in the one month of January. As this tendency became more well known, the rally start date crept further into December and soon the start of this period became known as the Santa Clause Rally.
(Sounds like a bedtime story, eh?!)
And soon Santa brought an orange and an IPhone for every boy and girl who had been good....
For much of 2007, the small caps under-performed and the big gainers were the multinationals with exposure to China and overseas sales. The laggards actually became the safe haven when the only liquidity to be found on the sell side in the summer debacle was in the big caps. The market is now at an interesting juncture going into the end of the year: Will the small caps outperform as the "Santa Claus" rally kicks in, or will instead the Small caps outperform by being the safe haven if the Santa Claus rally fails to kick in?
A failed seasonal tendency can result in a big move in the opposite direction. Either way, there is one heck of a 4 day coil built up on these SPs, and the small caps clearly have been outperforming to the upside or, not losing as much ground when the market sells off this past week. Everything is relative, right?
Liquidity sure helps, and the FED has been making sure that there is plenty of that going into year end...........
I was feeling badly that I had not written a blog for awhile.....what was there to say? the markets had just been so incredibly dull and boring. Then I visited Rick Bookstaber's website again, and noted that he had not written much over a two month period either (gee, busy trading too?)
The parting shot: Prices are determined by liquidity issues, not by value. That works on the upside when there is plenty of liquidity and the downside when there is not.
His latest blog (December 6th) is a good read.
Happy Holidays to all!