First the Santa Claus Rally failed, now the First Five Days indicator is also negative

Despite a huge rally Monday led by tech stocks that drove up the S & P 500 by 1.4%, a second seasonal indicator is flashing red. First the Santa Claus Rally failed. Now the First Five Days indicator is also negative. The S & P 500 is down 0.1% in the first five trading days of the year. Jeff Hirsch at the Stock Trader's Almanac notes that the First Five Days indicator has a "respectable" track record: In the last 18 presidential election years, 15 years followed the direction of the First Five Days.

.SPX 5D mountain S & P 500, 5 days Combine that with the failure of the Santa Claus Rally, (the tendency of the S & P 500 to rise in the seven day period from the last five days of the old year and the first two of the new year, on average good for a gain of 1.3% in the S & P 500 but this year down 0.9%), and seasonal indicators are so far delivering only warning signals.

"The failure of stocks to rally during this time has tended to precede bear markets or times when stocks could be purchased at lower prices later in the New Year," Hirsch wrote recently to clients. The third part of the seasonal rally, the January indicator ("as goes January, so goes the year"), has not finished, but the record in election years has been soft: only 12 of the last 18 full years have followed January's direction.

Don't get too pessimistic though. There's still hope. The Santa Claus Rally and the First Five Days indicator have failed together 9 times since 1969, according to the Stock Trader's Almanac. Of those 9 times, the S & P 500 has only been down for the full year twice. The only two times that has happened? 2000 and 2008, both disastrous years..