Dope 'em - Dec, Jan Effects of Markets

Just some of the similar events that took place simultaneously across the world:

• S&P 500 Index Climbs to Pre-Lehman Bankruptcy Level 
• Seoul shares hit 38-mth high as worry eases
• European shares hit 27-month high
• Nifty crosses 6k, Sensex crosses 20k after 5 weeks
• Nikkei hits 7-mth closing high on bargain hunting
• Copper and Cotton also moved up higher, Coffee jumped to a 13 year high (its definitely on caffeine !)

Apparently, the reasons for all these highs include:

• China backing the efforts put by Euro zone to contain the crisis (like there was an easier choice to make; besides, is China signaling a similar action being taken under similar circumstances is justified for them as well?)
• North Korea has backed away from threats to retaliate against the drill
• Mining companies rising on higher metal prices, (helping European shares edge higher)

These are despite the fact that nothing has changed much fundamentally, and:

• Spain is already going deeper into trouble (it just successfully sold its bonds at a much lower price to raise debt further)
• Moody's has cut Ireland's rating by 5 notches to below investment grade and put Portugal on watch for a rating cut, along with Spain.
• US has extended tax-cuts, further releasing (indirectly, by not taking that is) around USD 900 billion which will not help US in reducing their debt faster in any way. (While we're talking about US debt, check out this website...it gives a really amazing picture of how US debt levels are increasing by the second)
• More and more states in US are approaching bankruptcy, and are taking drastic measures to cut expenditure, even at the cost of hygiene and security of the general public.

It looks pre-medicated to me...and there good reasons for that. December is usually when most big funds close / report their year-end M2M profit / loss. A lot of profit taking and loss-taking (minor losses - to set of the profits a little bit) takes place. For the trading and accounting books to look good, the markets are generally given a dressing...which could be possibly what is being done right now. This is typically known as the "December Effect". Since 1950, S&P 500 has risen in December 45 years out of 60...statistical coincidence anyone?

Overall, there is not much reason for markets to cheer, considering they've just come out of shocks of Euro zone and Chinese interest rates, both of which refuse to go down, but are staying put for now (I guess these days, that's a good enough news to buy). Looks like the December effect is taking place. After this...well, "January effect"...which says that if S&P 500 is net positive for the first 5 trading days in January, it'll sustain that trend through the rest of the year. However, the inverse of this is not true...if S&P 500 gives a net negative return for the first 5 trading days of January, then markets can actually go anywhere...there are no reliable statistics to prove up / down movement in this case. This apparently happens as the stocks which are sold off (for booking losses) in December get into the oversold territory and are picked up by the bargain hunters.

What's next? Well, if I had a 5 year old kid, (I have a 2 year old daughter), the kid would have replied "Daddy, tell me the February effect story..." ! Well, I don't have one...but I can figure out something...after all, Statistics is an interesting subject...