Dow Jones Industrial Average: December 2005
click for larger chart

Djia_dec_2005

Courtesy of Stock Charts

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When the Dow closes below its December closing low in the first quarter, it is an
excellent techncial  warning sign. The lowest actual closing price for the Dow Jones industrials in December was made on the very last trading day of the year — 12/30/2005 at 10,717.50.

Closing price on Friday?  10,667.39

What’s that mean for the market? Consider what the December low has meant in the past:

"The December Low Indicator was originated by Lucien Hooper, a Forbes columnist and Wall Street analyst back in the 1970s.

Hooper dismissed the importance of January and January’s first week as reliable
indicators. He noted that the trend could be random or even manipulated during a holiday-
shortened week. Instead, said Hooper, “Pay much more attention to the December low. If
that low is violated during the first quarter of the New Year, watch out.”

The December low not being violated improves upon the January Barometer. If the December
low is not crossed, than according to the stock trader’s almanac, the January Barometer becomes virtually
perfect, right nearly 100% of these times.”

-Stock Trader’s Almanac

In the past, when the December low has been violated in the past, at some point, markets have been down later that year every single time but one. The average drop is about 10.7%, but its been as small as 0.3%, and  as large as 25.1%.

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click for larger table

via Stock Trader’s Almanac

December_low_sta_2

This should clarify the history somewhat . . . 

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UPDATE: January 23, 2006 10:19pm

Here’s what it looks like when the Dow does not violate its December low

Dec_low_no

Source:
Stock Trader’s Almanac
http://www.hirschorg.com/declow/

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “The December Low Indicator: 10,717.50”

  1. Dave says:

    correlate the negative years to those of secular bears and even GDP% and ‘by eyeballing it’ shows a deeper perspective.

  2. David Silb says:

    In an earlier thread we discussed the headlines and articles exhalting the return of the Bull market I commented on a cnn.com article that said among other things that, ‘January is a good benchmark of the feelings of investors for the upcoming year.’

    I think this makes their whole argument mute.

    Very good graph Barry.

    I think I got a new handle for you after this one.

    “Graphmaster B”

    Or

    “Chart-topper B”

    What do ya think????

  3. Bynum says:

    Usually Barry is great with charts, but this appears to be worthless. The average full year return from the sample is +.47, with a standard deviation of nearly 14. The market will be up or down 14% two-thirds of the time? I’m shocked, SHOCKED! Not trying to clown on Barry at all, given that he, Helene and Guy are my favorites commentators over at Realmoney, but on it’s face. the chart is less than compelling.

  4. Payam says:

    From an earlier post: “Any single variable will give you an easy prediction, a goiod bumper sticker, but have a low probability of a correlated predictive outcome.”

    So why the sudden love for numerology?

    Oh yeah, and if you look at the closing price in the Dow the day *after* the shepard population in Egypt has slaughtered the fewest number of sheep in 3 months, and compare it to the midday range on the day that GE announced earnings in the same quarter — if it is within the range then the S&P 500 will beat the average growth mutual fund that year.

    Give me a break.

  5. David Silb says:

    Hmmm. I guess I should clarify that I do not make my living trading in the market. I only get to live with outcomes created by traders. I think you can make money in any market and if goes up or if it goes down as a whole winners and losers will abound.

    What I don’t see is a lot of “insider” types as honest about the economy as this blog is. Ford, among other companies are having a difficult time of it. And in the “real world” that accounts for people’s lives.

    If the number of sheep in Egypt indicates something than that is a factor to take into consideration.

    If the market moves 14% in either direction isn’t that normal course of business? Gain 14%, Lose 14% isn’t that what we pride ourselves on? The ability to make gains while facing risks? WHO WINS and WHO LOSES is the over all point.

    BTW price of oil moved on the latest issues with Iran. Is that not chartable and a noticable consideration.

    Charts are good at showing previous outcomes of various situations. If you think this chart is wrong go ahead put you money into Real Estate, Technology/internet stocks, buy commodity options or futures.

    But remember you think slaughtered sheep, uncertain oil supplies, the remergance of Osama Bin Laden, Ford Motor and GM in financial trouble are not market movers than go ahead put your money in the market. I double dog dare you!!!

    The point is that we are facing something that may be connected to some historical data. It DOES NOT mean it will happen.

    Again Barry great chart thanks for the heads up.

  6. Bynum says:

    And another thing; the market has violated it’s December lows roughly 50% of the time. How can one extrapolate anything from that kind of randomness?

    You wanna talk about a real January indicator? 42 of the last 50 years whatever the Dow has done in January it has also done for the year (down in January, down for the year). Of the eight instances in which January’s outcome was different than the year’s only two years did not mark significant tops/bottoms (1956, 1988). As it appears we are closer to a top than a bottom, this week’s outcome will be of particular interest.

  7. Andrew says:

    The fact that the December low came on the last day of December would seem to greatly reduce the value of this indicator.

  8. Payam says:

    David,

    In the spirit of discusion, I’ve got some responses to your points. They’re not perfect, and it’s not exactly how I’d put it given a few days to allocate to making a response, but here I go…

    “Hmmm. I guess I should clarify that I do not make my living trading in the market. I only get to live with outcomes created by traders. I think you can make money in any market and if goes up or if it goes down as a whole winners and losers will abound.”

    If by make money you mean do better than average, then yes, you *can* do better than average. You *can* also do worse. The average market participant will do average (not accounting for transaction costs or manager costs in the case of investing in mutual funds).

    “What I don’t see is a lot of “insider” types as honest about the economy as this blog is. Ford, among other companies are having a difficult time of it. And in the “real world” that accounts for people’s lives.”

    Agreed — this blog rocks. One takeaway from the post is that you can look at one technical indicator (performance in the first week in January) and come to one conclusion, and another (dropping below December’s low) and come to another conclusion.

    “If the number of sheep in Egypt indicates something than that is a factor to take into consideration.”

    My example was an absurd extreme whose purpose is to exemplify that the factors being looked at in the post (relative performance of the DJIA on the cusp of the arbitrary “new year”) is absurd as well, though obviously not as extreme.

    “If the market moves 14% in either direction isn’t that normal course of business? Gain 14%, Lose 14% isn’t that what we pride ourselves on? The ability to make gains while facing risks? WHO WINS and WHO LOSES is the over all point.”

    I’m not sure what you meant here.

    “BTW price of oil moved on the latest issues with Iran. Is that not chartable and a noticable consideration.”

    Yes — the change in price of oil in response to new developments in an oil producing country (among other reasons Iran is important in the world of oil) makes a lot of sense. And!! If you knew about the developments before anybody else in the market, then you could have profited from it. But now this this information is known, both by the buyer and the seller in the futures market (and therefore the price reflects this, supposedly since both buyer and seller are rational), how much sense does it make for somebody to make a buying decision because something happened without even looking at the price?

    “Charts are good at showing previous outcomes of various situations. If you think this chart is wrong go ahead put you money into Real Estate, Technology/internet stocks, buy commodity options or futures.”

    This chart predicts downward movement in stock prices, and since I think the chart is a useless predictor, does that mean I think that stock prices will experience upward movement in the year to come? All I indicated is that this information is not very useful — I did not say, and it would be wrong to say, that therefore the *opposite* will happen.

    “But remember you think slaughtered sheep, uncertain oil supplies, the remergance of Osama Bin Laden, Ford Motor and GM in financial trouble are not market movers than go ahead put your money in the market. I double dog dare you!!!”

    We’ve already discussed why I used the slaughtered sheep example, but in response to the rest of the list (which is mostly a list of world events), how do you know that the occurrence of these events has not already been priced into the market? Everyone knows that oil supplies are uncertain, that Osama allegedly had something else to say and said it, and that Ford and GM are in deep trouble. How can you know that you should act on these events without even looking at the prices?

    “The point is that we are facing something that may be connected to some historical data. It DOES NOT mean it will happen.”

    Agreed. I also think that used historical data about prices incidating future movement in prices is a self-defeating proposition. I think that historical data about fundamentals indicating future movement of fundamentals is quite valid.

    “Again Barry great chart thanks for the heads up.”

    Agreed. I’d rather have seen this chart than to not have seen it, and I’ll be back to see other posts. Thanks.

  9. I think the market is a problem. However, I am getting into Chipotle. You cannot eat better for 5 bucks. They are in just a few states, and mostly owned by Macdonalds, but this company has major loyalty from young people. The symbol is cmg.

  10. David Silb says:

    Payam,

    Thanks for your point by point reply to my post. Critical review of my work is always appreciated. I would like to point out that I shot off a response in between fielding calls and handling other matters, so yes maybe I did express myself not as clearly as one would have hoped.

    Yes, it is obvious that if I took more time I could structure a more concise reply. I do apologize if you think me ignorant for not building a better point by point thesis of my criticism of your post.

    The chart on the Dow as a whole is, of course meaningless, if taken as the only indicator of future events. The chart, if viewed in a wider context, may be used to reaffirm a position being taken up by many readers of this blog that the market and economy, if we expand our scope, has many negatives or “drags” to overcome if a “Bullish” trend is emerge.

    If you take in to the fact that most people who read Barry’s blog are a little more then just acquainted with the equity markets one could expect a little shorthand is in effect. Your example is and was a little insulting, given the fact that emerging patterns of various types and from different areas *can* and *are* sometimes the best indicators of possible movements in the market. So, if the slaughter of sheep as you used could be correlated to a plausible theory then it is possible to be used as an indicator.

    The Dow is, by its very nature, designed to be an indicator of the “state” of the United States economy. And plausible trends in the Dow may be used to point to future events i.e. this chart under discussion.

    My 14% + statement were referring to the person above your entry and I was pointing out that our national organization of the equity markets is supposed to allow both “winners” and “losers” in the market place. In other words I was pointing out the efforts for transparency. That was not directed to you and since you do not understand it is merely because it wasn’t directed to you.

    You refer to reviewing prices before making economic decisions. That makes little sense from an economic stand point. Events occur and prices follow. Prices never lead events. They, prices, may be an event but they, prices usually require the event to occur prior. I think without much discussion, markets are moved clearly without anyone knowing all the facts regardless of price. Pricing into any given market is a very fluid process and how can you say that anything *is* priced into the market. Pricing considerations may exist but again any world event changes prices and may require a recalculation so you say ‘how do I know these world events are not priced into the market already.’ I don’t, the same way the Ford and GM executives had no idea how to factor in the rising costs of healthcare, increased competition, and changing personal incomes and tastes of consumers would affect their particular domestic and international auto markets and ultimately the equity markets.

    If you disagree then I ask you to explain why often the term “investors’ jitters” is used to describe market movements. I think you over simplify *pricing* in your argument. I have seen companies whose stock traded far below the break up cost. A price can go to zero.

    This chart, in my opinion, was a full summation of how past investors factored in externalities into the pricing of the market. I felt that it is a good indicator of how past investors “looked” at prices and currents events for their times and determined that in the course of human events things may not go as planned and the indication of positive outcomes may be in question. And since the Dow and the equity markets are supposed to be better indicators of the economy roughly six months into the future, this chart provides evidence to that fact.

    If we can learn from this chart is that prior investors factored in many sources of data into the *price* of the equity market and it was reflected in the Dow. Hence the belief that this chart carries merit.