'The December Low Indicator'

When the Dow closes below its December closing low in the first quarter, as it did on Friday, the market is likely to experience further declines.

Since 1950, the “December Low Indicator” been 93.5% accurate in forecasting a further stock market decline when the Dow closes below its December closing low during the first quarter.

In other words, the lowest close in December is broken in the following (first) quarter.

Since 1950, this occurred 31 times. Out of those 31 instances, the market continued to decline 29 times (on average by 10.9%).

In about half of those 31 instances, the market closed higher for the year.

The point is, we should be ready for a sharp sell-off this year.

'The January Barometer'

By the end of this week, we will also have the "January Barometer" to work with. In short, so goes January, so goes the rest of the year.

So with the December Low Indicator in effect, we may see that signal combined with a negative January Barometer. According to "The Stock Trader's Almanac":


"Every down January since 1950 was followed by a new or continuing bear market, a 10% correction or a flat year.

"Excluding 1956, down Januaries were followed by substantial declines, averaging minus 14.1%.

"In the 20 years after 1950 -- when both the January Barometer was negative and the Dow closed below its December closing low in Q1 of the next year -- the Dow suffered additional declines averaging 14.5% from the closing price on the crossing day to the subsequent low."

Remember in 2008, how the words we heard daily from either the Fed, Congress or the Treasury Department sent the stock market charging strongly in either direction? Well, it's starting to smell like that once again this year.

Of course, it probably won't be as severe, and this time around we'll have a president making major moves along the way. (The younger President Bush seemed to be cleverly hiding in the shadows in the second half of 2008 to avoid hurting the possibility of a new Republican White House.)

But what's important is that you don't fight the trends.

You must trade with the trends, stay hedged, and don't be afraid to buy on the large dips.

The biggest buying opportunities have been presented during mid-term lows, as the strongest part of the four-year election cycle happens to be the pre-election years ... like 2011!