Why I'm Really Excited About the Next Two Weeks

My paid-up Stealth Profits Trader readers had the chance to play 59 triple-digit winning recommendations in 2017.

I'm expecting 2018 to be even bigger, if you can believe it, starting right now.

When the bell rang yesterday morning on the first trading day of the new year, trading began under the direct influence of the most sweeping tax reform to hit corporations and individuals since 1986.

It'd be tough to overstate the impact this is going to have on the markets - and your bottom line if you play it right.

I expect the explosion in stock prices that's been unfolding over the past few weeks and months of the legislative push will have been "just a taste" as we get deeper into 2018.

Here's what I'm looking at...

The Markets Could Pull Back... and That Would Be Great

Of course we all know the old chestnut that investors love to "buy the rumor and sell the news."

If the biggest tax overhaul in 31 years, with all its immense capacity to drive behavioral change in companies and individuals, isn't news, then I don't know what is.

Still... by and large, recent attempts by investors to sell that news have been met almost immediately with buying.

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I said as much on FOX Business' "Varney & Co." recently when host Stuart Varney asked me whether tax reform's passing into law was a "sell the news" moment.

Here's what I think...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

excitedWe didn't get a pullback last week. I think we have changing tax brackets and a desire to defer profit-taking to thank for it.

I expect any news-selling pullback, if there's going to be one at all, will be very small indeed. And if it's coming, it'll come sometime in the next week or two.

As remote as the possibility is, I'm going to keep some capital free to deploy during any pullback because "Extreme Continuation" opportunities are likely to open up all over the place if that happens. Some ridiculously huge profits are possible when strong stocks get caught up in oversold situations.

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Now, it makes good sense to be prepared to move if there are any drops, but like I said, this is all very "what-if." The chances of a pullback of any real severity are as low as the wind chills on the East Coast right now (read: really low).

Instead, here's what I think will really happen.

Santa Claus Hasn't Left Town Yet

Cash levels are at multiyear lows right now; even the bears are all-in on this market.

Still, there is money out there on the sidelines waiting to pour in, and you can't discount the powerful effects of sector rotation as the money that's already out there moves right smack into stocks well-positioned to ride lower taxes to higher highs - especially companies with the opportunity to "re-shore" or repatriate cash from overseas.

What's more, there's the Santa Claus indicator to contend with. Just about everyone is back to work after the holidays, but this seasonal tendency is still playing out and will for a few days yet.

The classic phenomenon, first explored in Hirsch & Hirsch's classic "Stock Trader's Almanac," is pretty simple.

It looks at market performance over a seven-day trading period - the last five trading days of the current previous year and the first two trading days of the new year. What we find are some compelling stats.

Since 1969, this seven-day period has returned positive results in 35 out of 48 years for a 73% win rate and an average gain of 1.6%. Looking back another 20 years shows that the seasonal move holds up with a similar percentage of wins but a modestly reduced average gain.

There are a few very real institutional investor practices that can drive up prices this time of year, too.

Institutions and funds have new money coming into them during the first couple of days of the quarter and of the new year. Money from automatically funded accounts (pensions) and other systematic contributions has to be put to work. This well-known money flow effect causes the first two days of the month and quarter to be better performers on average than any other two-day period.

So putting the fundamentals and the statistics together, the Santa Claus rally does seem to have validity and should be taken into consideration as an input (but not the only input!) for your investing and trading decisions.

The past few years have given us some strong outside influences during this period, from fiscal cliffs to poor China growth numbers. Seasonal tendencies - even ones with strong histories - are not immune to significant global news. I'm betting tax reform will be a massive positive here.

Of course, seasonal tendencies can be hit or miss. You have to look at the fundamentals, and the fundamentals here and now are strong, showing optimistic investor psychology in the context of a strong economy.

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About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

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