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Posted on 2 December 2011 | 2,454 views

Has the Santa Claus Rally Already Started?

All we needed for a “Santa Rally” was to put off bad news from Europe until next year and this could be the beginning of that — the markets sold-off a sharp 8% over seven consecutive trading sessions — not exactly what investors were hoping for heading into the Thanksgiving holiday.

The 490 point rally on November 30, 2011 in the Dow Industrials was quite a change of pace after the “Worst Thanksgiving Week” market since 1932. To say we didn’t get a “Thanksgiving Rally” is an understatement — however, stocks surged as the Fed, the European Central Bank and other central banks around the world decided to join forces and inject liquidity into the markets.

A Santa Claus Rally is the last five days of the year plus the first two days of the next — on the return front, the average gain during those seven trading days has been 1.5 – 1.7% for the last half century. This investing strategy based on seven trading days is data mining and what these numbers are telling us is we best pay at least some attention to the trading at the end of next month.

The market’s mood tends to brighten in December in what’s often referred to as the “Santa Claus Effect” — in fact, stocks have risen in the fourth quarter nearly four out of five times since 1945, according to Standard & Poor’s Capital IQ and over that same time period, the S&P 500 index has gained an average 7.2% in the fourth quarter, following an average 10% drop in the third quarter — similar to what we saw this year.

When you think of December and the stock market doing well, the first sector you think of is Technology stocks but that’s not necessarily the case. All three technology related groups in the S&P 500 actually underperformed the S&P 500 during the month of December — and that’s going back to 1990.

Next, you think Retail stocks but that sector also underperformed — the sectors to watch for a Santa Claus Rally are Healthcare, Commercial Services, Capital Goods and Media stocks.

So, is this a good time to buy stocks if they are poised to rise through the end of the year? Or is this an even better time to unload them, taking advantage of the higher prices?

If Santa Claus Rally should fail — bears may show up on Wall Street — 1999 to 2000 as well as 2007 to 2008 were recent warnings of doom when investors would have been well-served to heed or just wonder — did we simply get our Santa Claus Rally early or is this our Thanksgiving run-up, just a week late?

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