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We're on the Verge of a Tremendous Buying Opportunity

By Jeff Clark
Thursday, December 6, 2012

There's a little, faded yellow sticky note posted in the upper right-hand corner of my computer monitor. It reads...
 
"Buy stocks on December drops."
 
I put it there a few years ago to remind me of the right strategy to use this time of year...
 
December is the second-best-performing month of the year for the stock market (April is first). And most of the market's gains over time occur in the six-month period between November and April. So it makes sense to be looking to buy stocks this month.
 
You can't just buy at any price. It's rarely a good idea to chase stocks higher into overbought conditions after an extended upward surge. But buying after sharp December declines often works out well.
 
For example, back in 2008 – in the midst of the financial crisis, the S&P 500 fell hard in late November and bottomed on December 1 at 830. By December 31, 2008, the index was at 930. That's a gain of more than 13% for the month, with most of those gains coming in the final two weeks.
 
In 2009, the S&P 500 bottomed on December 10. It gained more than 3% by the end of the month, and more than 6% by mid-January.
 
In 2010, stocks bottomed early in December and then rallied 5% over the next four weeks.
 
And last year – where the action leading up to the December 19 bottom in stock prices looks eerily similar to what we're seeing this year – stocks gained almost 6% in the final two weeks of 2011.
 
Take a look at this chart of the S&P 500 and notice the similarity to last year...
 
The S&P 500 Fell Hard in November of 2011
 
Stocks fell hard in November 2011, reached deeply oversold levels, and then bounced just as hard. The S&P 500 got sharply overbought by early December.
 
The decline into mid-December 2011 served to lessen the overbought condition, retrace 50% of the bounce, form a higher low, and set the stage for a strong intermediate-term rally.
 
It looks like we may get that same sort of action this year. We've already seen the sharp November decline and the equally sharp rally. A solid pullback now that forms a higher low may present a tremendous buying opportunity for a strong rally into April 2013.  
 
As I mentioned last week, I'm not a big fan of buying stocks with the S&P trading so close to my year-end target of 1,430. There just isn't enough upside potential to justify the risk.
 
But if we get action similar to last year – and the S&P retraces a good portion of the recent bounce – that will be a tremendous buying opportunity.
 
Best regards and good trading, 
 
Jeff Clark




Further Reading:

Jeff has been holding off on new buys since late last month. See two more charts he is keeping in mind here: 
 

In The Daily Crux
Market Notes
Financial stocks (XLF) are the best-performing major sector in 2012... up 24%.
 
Bank of America breaks out to its highest level in more than a year.  
 
"Big Pharma" uptrend continues... Sanofi hits a fresh four-year high.  
 
Another 2011 IPO takes a plunge... Pandora falls nearly 20% after announcing latest results.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1359.88 +0.5% +9.9%
Oil (USO) 31.93 +1.4% -18.8%
Gold (GLD) 165.88 -0.1% -3.3%
Silver (SLV) 31.21 -1.0% -4.9%
U.S. Dollar 81.18 0.0% +4.0%
Euro 1.27 -0.6% -5.6%
Volatility (^VIX) 16.41 -8.8% -51.0%
Gold Stocks (^HUI) 440.85 +0.9% -24.7%
10-Year Yield 1.57 -1.3% -22.3%

World ETFs
Symbol Price
Change
52-Wk
Singapore (EWS) 12.76 +0.1% +14.5%
Taiwan (EWT) 12.69 +0.1% +5.2%
USA (SPY) 136.37 +0.5% +12.3%
Israel (ISL) 12.45 -1.0% -4.8%
S. Korea (EWY) 56.65 -0.2% +7.0%
S. Africa (EZA) 64.65 +1.9% +7.5%
China (FXI) 35.77 +0.2% +1.5%
India (IFN) 21.53 -1.1% -3.7%
Canada (EWC) 27.10 +0.6% +1.6%
Japan (EWJ) 9.06 +1.8% +1.6%
Lat.America (ILF) 40.87 +0.3% -5.1%
Russia (TRF) 13.68 +1.1% -12.6%

Sector ETFs
Symbol Price
Change
52-Wk
Construction (PKB) 15.81 +1.9% +36.3%
Media (PBS) 15.66 +0.8% +22.7%
Health Care (IYH) 81.37 +0.8% +21.3%
Consumer Svcs (IYC) 83.17 +0.6% +20.2%
Financials (IYF) 57.01 +0.8% +21.6%
Real Estate (IYR) 61.89 +1.1% +16.3%
Water (PHO) 19.09 +1.0% +13.4%
Retail (PMR) 24.59 +1.2% +16.0%
Insurance (PIC) 16.65 +0.1% +13.0%
Biotech (PBE) 22.19 +1.7% +16.4%
Telecom (IYZ) 22.91 +0.1% +13.3%
Big Tech (QQQQ) 62.30 +0.4% +10.1%
Defense (PPA) 19.53 +0.6% +10.2%
Industrials (IYJ) 68.59 +0.4% +11.0%
Software (PSJ) 25.98 +1.1% +4.2%
Utilities (XLU) 34.36 +0.9% +2.5%
Transportation (IYT) 86.80 -0.5% +0.8%
Basic Mat (IYM) 63.96 +0.4% -1.6%
Semis (PSI) 13.12 +0.6% -9.3%
Nanotech (PXN) 5.44 +0.2% -14.0%
Alt. Energy (PBW) 3.53 -0.3% -34.6%

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