Click to enlargeThe past few days in the market have begun what many analysts refer to as a manipulated end of the quarter rally – window dressing. This manipulation stems from the idea that big money run up the end of weak quarters in the market to help salvage the past three months of mediocrity by buying undervalued assets to dollar cost average as well as spark rallies.
How often do “manipulated” rallies take place at the end of quarters, and what can we expect from the very rally we are experiencing right now?
We took a look at the Dow Jones Industrial Average (^DJI, DIA) the week before and after each quarter ending (Jan-Mar, April-June, July-Sept, Oct-Dec) to see if any patterns form and whether or not stocks are truly pumped at the beginning or end of a quarter.
After analyzing the past 46 quarters tracing back to Q1, 2000 here is what we found:
Data show that we in fact do not pump stocks into the end of quarters as much as some might think. More often than not (67% of the time) it is actually the first week of the quarter that tends to rally. Although these rallies are not huge, they are fairly consistent.
With this in mind, it would be more beneficial to analyze both the last week of the quarter and the beginning of the next quarter simultaneously. With gains imminent this last week of the quarter, what can we expect to see during the first week of quarter four?
Now that we have this preliminary data showing how more often than not it is the week following a quarter that tends to do well, we would like to analyze the data for all quarters where there was a loss (i.e. to determine whether or not these quarters are actually “pumped”).
The following data adjust for only quarters that experienced a loss. The data are compiled in the exact same manner as before, removing all quarters that realized gains.
We see here that the last week of down quarters, although they see a final down week more often, see a possibility of large gains heading into the next quarter, with average gains larger than average losses.
We see the same trend as earlier, which points out that the first week of the quarter following a down quarter tends to be pushed much stronger than the final week of the previously weak quarter. Also, 72% of the time, the first week of the next quarter realizes gains. Unfortunately, these gains are muted by the large losses that can be carried over from the previous quarter.
In order to fully understand our current place in the market we would like to combine every aspect we have analyzed so far to paint a fairly similar picture to our position today. Taking one further step from the data we most recently analyzed, we would like to see how the first week of a quarter fares after the final week of a poor quarter ended up (i.e. if the market is “manipulated” during the final week of a poor quarter, what happens the next week of the new quarter?).
This final analysis gives us the greatest confidence heading into next week. Also, 71% of the time that the market headed up in the final week of a down quarter, the next quarter began with an up week. The average gains seen during this week are 1.40%, with the maximum losses less than -1%. This statistic bodes well for the bulls that are leading this market push at the end of the quarter. For all of us out there that are bearish on the market, we should be careful heading into next week. We see next week continuing this so-called “manipulated” trend for gains approaching 2%.
In general, we look headed into an up week considering the market history we have researched.
How can you play this?
The four stocks we like best right now for continued upside into another good week are:
Costco (NASDAQ:COST) – With earnings coming next week, the stock may see a nice run-up into earnings. The company has had good reports over the past couple quarters, and it is looking like they may be ready for another good one with more growth in EPS. The company has tough resistance at 86, but great support at 83. Buying around 83, selling some at 86, and then a breakout from there would work well.
Direxion Daily Large-Cap Bull 3x (BGU) – If we are going to have a nice up week, then large caps will be participating, and why not get some leverage behind a rally? Large caps are safer than small caps, and BGU is a great way to take advantage of rallies with leverage on safety.
Nalco Holding (NYSE:NLC) – Nalco is holding a 50-day MA and upward price channel right now at the $35 level. The company is consolidating at that line and may be preparing for a push back to $37.50, which is a key resistance line. A large rally could see a breakout from that level.
Target (NYSE:TGT) – The company has held its own since a great quarter reported in July. The company has flat lined, which is outperforming the market. The company has a nice upward price channel, and it is consolidating around its MAs, which are all consolidating. That seems to point to a breakout, and it should breakout to 53-54 if we get another good week next week.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.