“Nowadays people know the price of everything and the value of nothing.” -- Oscar Wilde

Santa Claus is coming to town.

The price of the DJII continues to move toward equilibrium with its dividend-discount value of almost 30,000 as the return of the Santa Claus rally approaches. This should speed up the ascent of the market over the rest of the year.

The Santa Claus rally stems from a few factors repeated every year:

• The October year end for many financial institutions;
• Tax loss selling dissipates;
• A major income tax payment date comes on December 15 and
• The U.S. Treasury is flush with cash through the remainder of the year;
• There is a flood of semi-annual and annual bond coupon payments that are paid as the year end approaches.

These factors have historically resulted in a rally coinciding with the appearance of the ‘Man in Red’. We see no reason why Santa should be missing this year.

Conclusions

• The U.S. economy should continue to grow modestly unless there is a big change in fiscal policy with, for example, a big step up in infrastructure spending.
• Inflation should remain benign especially with lower oil prices.
• The DJII price is 40% below its dividend-discount value. There is thus considerable upward pressure on the price of the DJII as well as the S&P 500. This provides an excellent backdrop to be fully invested in equity ETFs and select equities.
• Over the short term the Santa Claus rally should see U.S. equity markets strengthen through the end of the year and beyond.
• Both short and long term interest rates should remain benignly stable.
• The sell-off in gold is not warranted and a rebound $1,400 per oz level is in the offing into 2015 but a runaway price is not expected. This should be good for battered-down gold shares as they return from near-death experiences.  

On October 15, 2014 the following flash alert was published:

Market Panic Selling Overdone "Buy and take no prisoners"

The dividend discount value of the DJII is very close to its historic high. Earlier today it hit a record high when the 30 Year T bond rate fell to 2.75%. In the past this has proven to be the best time to buy. 

The above alert was published with the conviction that the price of the DJII was moving in the wrong direction to its intraday dividend-discount value that had reached an all-time high as the 30 year T bond yield fell to 2.75%.

The subsequent rapid rebound of the DJII price and its continuation to new all-time high ground further strengthens the conviction that using the dividend-discount model is correct and that the price of the DJII is going to move back into equilibrium with its dividend-discount value which is pushing 30,000.