The Dow 30 seasonal since the 1960's, as well as seasonals for SP500 futures since their 1982 inception (not shown), were "upside down" for much of 2006 until October when the powerful year end odds continued the strong uptrend from summer. The Dow shows a double top tendency for January and February, while the shorter historical seasonal for SP500 futures normally has topped higher and then has fallen away in mid February. Seasonals are like sports scoring and only tell you what has happened before, but they are useful for handicapping the market. The coming week is one of the stronger seasonal weeks even though it has low low volume.
Last week's drop of nearly 25 points in the SP500 would fall under the rubric of "year end book squaring" which includes portfolio re-balancing, hedging, and tax selling. We might see some "bonus buying" this week. The very short term sentiment measures got re-balanced. The Dow has stayed in its trading band of the last six months but is nearing the up trendline. Several timing methods point to tomorrow for a short term swing turn.
No changes have been made in the mutual fund portfolio, but over the next few months I'll need to separate higher yield investments from capital gain investments and get the former into tax free retirement accounts and the latter in taxable accounts. As I get closer to mandatory, and fully taxable, withdrawals from retirement accounts, I want to keep the higher yield funds away from the tax man and compounding as long as possible. Everything coming out of tax-deferred accounts is taxed as income, so it's wise to get capitals gains sources and non-taxable sources into the otherwise taxable accounts. So high-yield US municipals bonds and funds which throw off little income but a lot of capital gains need to go there. Both moves minimize taxes and keep one from falling into all the traps of progressive taxation of all sorts.
Those who are still in the accumulation and growth phases of portfolios needn't give this much thought and planning. When you are young you can just decide how much volatility you can live with. Generally with each passing decade your volatility threshhold needs to be reduced. You can recover from a 1987 or 2000-2002 event if you are in your 20's and 30's, but after that you can't risk a 50-90% wipeout and expect to come back by retirement time.
Partly by luck and partly by natural aversion to pain I managed to avoid big drawdowns in 1973-74, 1987, and 2000-2002, but I saw a lot of contemporaries awaiting retirement who were substantially wiped out by 2000-2002.
Most of us don't like to think about these matters as they bring home the fact that we are all and always growing "older". So try to think of it from the mathematical viewpoint: when you are 60 years old you have far fewer years in which to recover from a huge drawdown than you do when you're 25. And this is really linear with a flip of the coin at each successive year. Any year could see a bear market. (This is not a prediction, just the luck of the draw.)
If it's too painful to think about it very much or to do anything about it actively, just use those convenient retirement funds which major fund families offer, labeled "Retirement 2020" and so forth. Or hire an investment advisor, which I am not, to get you properly positioned.
None of this has anything to do with speculation. I am talking about what you do with your winnings from speculation and from working and chance inheritance or the lottery. In any event I try not to speculate after December 15 until January. The odds are we will see come sort of market retracement in January and February, but as we saw this year the market can persist to May, or later.
Recent Comments