We went into last week looking at some pretty strong chart action, and into Wednesday it looked like we were going to get some solid breakouts. Then, at the conclusion of the Fed’s FOMC meeting, the market indices reversed themselves and we ended with a flat to mixed week.
Here are the updated weekly, monthly, and annual TSP fund returns through December 14:
The S&P 500 hit some overhead resistance on Wednesday and by Friday had pulled back to the 20 and 50-day EMA’s. That’s not bad action, but it really needs to hold if we are going to see that normally strong final two weeks of the year.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Since this Weekly Wrap Up is posted on a couple of other websites, I know that some folks only read this and don’t always get a chance to read the daily commentary so I am going to repost something that I wrote on Friday because I think it could be a force at work against the normally strong seasonality of late December.
I did a little research on what happened at the end of 1986, beginning of 1987 – the last time the capital gains tax was raised. The increase passed congress in October of ’86 and after an initial rally in December of ’86, the S&P 500 fell 5% into the end of the year. We know that the last couple of weeks in December are normally a very strong time for stocks, so this was an obvious impact from investors selling to lock in the lower capital gains tax.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The good news is, after the capital gains selling was over and we moved into January 1987, stocks soared. They gained 13% in January alone and were up 25% by the time the market saw its first serious pullback in March 1987.
After a about a 10 week consolidation, stocks rallied even further but it all ended with the infamous 1987 market crash in October.
The moral of the story: Capital gains selling could be an issue as the year comes to a close, but if that happens, those sellers will likely be back buying strongly in January.
If things breakdown in the coming weeks, this could be why. Add the fiscal cliff deadline at the end of the year into the mix and we have a recipe for some justifiable jitters from investors. But the charts still look bullish, we needed a little rest, and I wouldn’t get overly bearish over it.
If a deal is reached in the fiscal cliff negotiations, we could see a nice pop in the indices, but the capital gains rate increase could still be a factor.
Good luck, and thanks for reading. We will be back after the weekend with a full market commentary on www.tsptalk.com/comments.html.
Tom Crowley
www.tsptalk.com
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