An Historic Black Friday Trade Continues Down Its Bullish Path

Includes: FXA, IVV, SPY, SSO, VOO, VXX
by: Dr. Duru

One hundred and two (102) calendar days and counting and the S&P 500 (NYSEARCA:SPY) still has yet to reverse all the gains from last year's Black Friday rally.

The celebration continues

The S&P 500 experienced an historic rally during last year's Black Friday: the 1.2% gain was its 6th largest Black Friday rally since 1950. The index's performance on that great day of shopping is statistically different (better) than all other Friday's since 1950. Shortly after that rally, I noted how Black Friday trading can also provide tea leaves for the future (see "Quantifying The Significance Of Black Friday Trading"). Basically, if the S&P 500 makes it through the first week of trading without reversing the gains of Black Friday at the close, then the odds become high that the S&P 500 will avoid such a fate for weeks and months. Using the closing price as the definition for this trade turned fortuitous when a Fiscal Cliff headline caused the S&P 500 to quickly drop to a retest of its 200-day moving average on November 28th. Another Fiscal Cliff headline helped the index bounce sharply and finish the day with a gain.

These 102 calendar days (almost 15 weeks) without a reversal of Black Friday's gain are also historic. This is now the 4th longest post-Black Friday period since 1950 without a reversal. Third place goes to a 115 period from 1979 to 1980 that this year's strong rally should easily surpass (as a reminder there were four years where Black Friday gains were never erased on a close: 1951, 1988, 1991, and 2011...could 2012 be next?!?). During this time I have finessed shorter-term calls to buy dips and short a few rips with mixed results. Tuesday's strong rally to multi-year highs essentially erased the latest bearish signals I was monitoring. I want to highlight in particular the Australian dollar and the volatility index (the VIX).

The chart above includes a downside target I estimated after noting the continued weakness in the Australian dollar (NYSEARCA:FXA) as a potential drag on stocks. Even though the Australian dollar fell to 7-month lows against the U.S. dollar ahead of the last rate decision from the Reserve Bank of Australia (RBA), it has since bounced sharply in relief. The RBA decided to leave rates alone, and I am assuming the subsequent bounce in the currency supports the rally in stocks for now. I have written in the past about the tight correlation in recent years between the Australian dollar and the S&P 500. The direct correlation has steadily weakened since the currency reached its all-time high against the U.S. dollar in 2011. However, I still think the currency will continue playing a role as a leading indicator.

One of the most fascinating developments in recent weeks was the sudden outburst from the volatility index, the VIX. Two weeks ago, I wrote "Global Markets Synchronize Into A State Of Calm That Does Not Equate To Safety" as the VIX dropped to seven year lows. Almost on schedule, the VIX surged 18% the next day. Five days later, the VIX surged another 34% in what was the 11th largest one-day gain ever for the volatility index. This week, the VIX has already reversed those gains and looks set to revisit 7-year lows in what is now a rapid return to a state of calm and contentment. Traders who trigger off headlines have experienced painful bouts of whiplash.

The VIX looks set for a rapid return to 7-year lows

Source for charts:

If the VIX remains at these low levels, churning up and down no doubt, it will likely support continued buying as the new-high celebrations roll onward with a renewed sense that such strong performance demonstrates "safety" has returned to the stock market. However, just like the sudden outburst in late February, such notions will continue to get the occasional rude awakening.

Finally, this year has started with strong fund flows into stocks, further supporting a bull run. The chart below compiled by Fidelity shows that unlike the previous years of the current bull market, 2013 is showing cash going into equity funds is rivaling the flow into bond funds. This year's flows are greater than the combined total over the entire bull market since 2009, particularly thanks to a very poor 2012.

Flows into stock funds are finally rivaling flows into bond funds

Source: Fidelity

Net-net, the bullish path seems like it is still clear for what I have called the Black Friday Trade. Once this rally passes the 115-day mark, it faces a long road to third place: a 808-day streak from 1971 to 1974. In other words, given the rally has lasted this long, there is plenty of reason to believe that it can last much longer.

Be careful out there!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long VXX shares and puts, and long SSO puts