A “Santa Claus Rally” refers to the final week or so of trading of each year - if, that is, there is a rally in the stock markets during this time.  Doesn’t look like there’s going to be for this year.

With the holidays I haven’t been around on this blog as much, but hopefully that will be changing coming into the new year again.  I’m about to buy a position tomorrow, so I’ll be researching during the day.  I have my eyes on a few.  Unfortunately I’m only able to buy one stock - at least that forces me to ease my way into the market in this volatile period.

Well, I have to say that the markets have really calmed down in the past month, which may or may not mean much.  I check the VIX rating each day (it’s a measure of stock trading volatility) and it’s down around 43 or so right now, which would normally be a sign of a market bottom by Jim Cramer’s standards, but as everyone’s saying lately, “these are not normal times.”  Remember, two months ago it hit up into the 80’s!  I must have been sleeping through that.

That said, I’m not sure what the new year will bring.  I think it’s just going to be more of the same for a while.  No one knows, right?  I still have a good 30 years of investing to go before I think I’ll be needing any retirement income, so I think I’m good to continue loading up on blue-chips whenever I can.

It’s always good to hear your opinions, though!  No one agrees on anything about the markets right now.  In fact, you know, I think the sign of a bottom is just when absolutely EVERYONE has heard and is talking about how bad the economy is right now…. and I think that’s basically been happening, don’t you think?

Another rally in the markets today.  The US dollar is down again and the Canadian dollar is up by another four cents, following on oil’s rise above $66 (it’s now at more than $68 after hours as I write).  Quite amazing how quickly the cash flows back in once those on the sidelines sense there’s a rally to be had.

Many reporters in the last few days have been discussing how volatile the markets have been over the last month.  I’ve been paying attention especially to the daily “records” being made: highest one-day rise since the 20’s; largest one-day drop in the history of the DOW; etc.  Up or down, it doesn’t matter - the fluctuations drive larger and larger swings.

The Edge of Chaos

If you study complexity theory, especially with regard to weather systems, you’ll know about how weather patterns are predicted to violently fluctuate with increased global temperatures.  It’s the same process at work in the boiling of water.

That’s why I think the global markets are basically a complex dynamic system fluctuating around that “period 3″ region, the region of chaos.  It’s here where new structures and changes are supposed to emerge.  But what will or can emerge at the edge of chaos in financial markets?  What does a new financial structure look like?  Is it a new relationship or system for managing relationships between currencies?

Here are some guesses for the sorts of “emerging structures” we might see:
-stronger “emerging” markets;
-changes in fundamental economic relations between countries
-new currencies or the death of previous ones
-cancellations of debt obligations
-major mergers or acquisitions
-other unexpected upheavals (for a smaller example, take the fact that Volkswagen is now the world’s largest company by market capitalization)

I’m sure you can think of others.  How dramatic the emergent structures are will depend on how volatile and bad the markets become.  Today’s interest rate cut by the Fed may have been the immediate cause for the rally, so we still don’t know how long the rally will stick.

Chances are it’s going to remain volatile for a while as many investors use this as an opportunity for purchases or sales that didn’t look attractive at lower or higher levels.  If the volatility remains but we don’t see more downward motion over the next week, I’d expect that to be an indication of the bottom.