Stock Trader’s Alamanac: Uh-Oh

Dow is off another 180 as I type this, ostensibly on rumors of Countrywide Financial (CFC) bankruptcy.

As I noted in May 2005, while sitting next to Angelo Mozila on Larry’s show, I wanted nothing to do with the long side of that company. However, I doubt the failure of a reckless and irresponsible lender, even the biggest one in the country, is the basis for today’s schmeissing.

Instead, I suggest its the ongoing move from Denial to Anger to Bargaining to Depression to Acceptance. That’s a process that may take a while, and be met by intervening pops and drops, rallies and sell offs. . 

Meanwhile, the Stock Traders Almanac points to two indicators that are quite negative for 2008: The Santa Clause Rally, and the December low:

When the Dow closes below its December closing low in the first quarter, it
is frequently an excellent warning sign. 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!”

13 of the 27 occurrences were followed by gains for the rest of the year –
and full year gains – after the low for the year was reached. Hooper’s “Watch
Out” warning was absolutely correct. All but one of the instances since 1952
experienced further declines, as the Dow fell an additional 10.1% on average
when December’s low was breached in Q1. Only three significant drops occurred
when December’s low was not breached in Q1 (1974, 1981, and 1987).

Also, see Santa Claus Rally fizzles, points to difficult year

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