Looking at the Rear View Mirror

The history of Wall Street is shorter than you think.  The S&P 500 was created in 1957, and the S&P futures were first traded in 1982.  It is difficult to get a statistically significant result from small sample sizes, and all the numbers are biased because you are making the basic assumption that the past 30-40 years of data are a good representation of the current market environment.  

It just happens that the US stock market has been in a huge uptrend since 1982, benefitting from 1) a dramatic decrease in the risk free rate as Fed funds rate went from 19% to the current 2.25% level.  2) a huge increase in profit margins as mergers and acquisitions fever hit Wall St., eliminating a lot of competition, and limiting wage growth.  3) a big increase in productivity thanks to technology.  That has stalled out over last several years.  4) a big increase in US stock market valuations.  5) A big decrease in both personal and corporate tax rates.  

I would argue that the future will be much less stock market friendly than the past 30 years because most of what I mentioned above will not be repeated.  The rise of populism is already happening under the current corporate welfare and income inequality regime, if that were to continue for much longer, there will likely be a revolt from the suffering masses.  

Yes, there are a lot of statistical studies out there that look at performance after oversold conditions, December seasonality, the year after a midterm election, etc.  Not only are the sample sizes biased, since they were mostly taken during a huge bull market, but number of cases is too small for it to be statistically significant.  You need hundreds and thousands of cases, and throughout all kinds of market environments, not just the past 30-40 years.  Even going back to 1900 isn't enough because that level of economic growth is not possible with the current level of population growth.  That is why you have to take most of these statistical studies with a grain of salt, they just aren't meaningful.  

We had a nasty selloff on Friday and sentiment is getting more bearish, but its been only 4 trading days since the top made last Monday.  Usually these selloffs last 5-6 days at the minimum, and since this is such a weak market, I would lean towards selling off more than expected, as that has been the tendency since the September top.  The market tone is vastly different (less time to sell the highs) than even February or April of this year when the market went lower.  Waiting for a capitulation under 2600 this week for a short term buy, or short next week if we rally above 2700 into FOMC on Dec. 19.