The Yen hit a high against the Dollar not seen since 1995, and the Japanese are taking action, including a new stimulus. While the stimulus looks modest in size, the intervention that should follow to debase the Yen should have a much larger impact. Over at ZH Yves presented a chart that shows a change of trend in the Yen. Over in Europe, the ECB has pre-announced a withdrawal of monetary stimulus, timing uncertain. The ECB head, Trichet, is in a tricky position as he wants to stem to rise of the Euro against the Dollar but at the same time is worried monetary easing will spark inflation. It appears by his actions that he will intervene to keep the Euro below $1.50.
Since the Dollar Index is heavily weighted against the Yen and Euro, a significant fall of the Yen combined with a stable or falling Euro will drive the DX up.
If these major currencies begin debasing against the Dollar, the DX will finally bottom. A Dollar reversal up is likely to accompany a Dow reversal down. Will this happen in the near term, and steal away the Santa Rally?
It seems unlikely. As the chart shows, the seasonal forces this time of year are quite strong. This chart is a summation of a number of years to show the average moves across the year. The seasonal strong period from Nov to May is quite pronounced. As Sy Harding has been touting for years, Buy in Nov and Sell in May is the best market timing strategy, at least most years.
An even simpler approach is buy in the week before Thanksgiving and hold into the first week of January; those eight weeks can be 40% of the rise all year. Or, wait out the two flat weeks after Thanksgiving, and join the Santa Rally, which on average can cover 25% of the whole year’s advance. The Santa Rally is quite real.
But the two weeks between Thanksgiving and the Santa Rally kickoff have tended to be flat. We are there now, and perhaps it will deter potential bulls. The Wall of Worry seems higher during a pause.
These seasonal tendencies are just that, tendencies. While the Santa Rally is quite real on average, it isn’t always there. We are going through a fairly ahistorical time, and the standard patterns cannot be expected to be there.
On the other hand, the wave count says we are in a small wave 4 (or B) sideways period, which should end tomorrow or early next week. Although counts can be constructed to show the wave 5 that follows has already occurred, it would have been a wimpy one. making this a low odds count. The more likely counts have a wave 5 or wave C to follow before the end – and they would be consistent with the size and duration of the last few waves (3 and 4) to run through the Santa Rally period, if not all the way onto Feb.