Here Comes Santa Claus

Global stock markets rallied broadly on Friday, and there is good follow through to the upside again this morning too. This is good news for the bulls indicating we may yet get a decent year-end rally. Not that Wall Street deserves a Santa Claus rally – after all banks and brokers haven’t been particularly nice this year.

In fact, Wall Street has been downright naughty – packaging all that sub-prime junk and selling it to unsuspecting investors. These bankers deserve nothing but lumps of coal in their stockings this year; and certainly NOT the fat year-end bonuses they’ll collect in spite of losses now exceeding $70 billion!

There’s an old saying on Wall Street that goes: “If Santa Claus Should Fail To Call, Bears May Come to Broad & Wall.” According to the 2005 edition of the classic Stock Trader’s Almanac, markets tend to enjoy a short but sweet rally nearly every year-end, usually taking place during the last five trading days of the year and the first two days in January.

In fact, this has been a fairly reliable indicator over time. Since 1950, stocks have posted an average gain of 1.5% during the Santa Claus rally phase, and since 1969 the gains have averaged a stronger 1.7%! However, the Stock Trader’s Almanac also points out that “Santa’s failure to show up on time tends to precede bear markets.

In other words, if market sentiment is so lousy that even a bit of year-end holiday cheer can’t trigger a rally in stocks – then watch out for more selling in the New Year. Of course I have been expecting just such a year end rally. Not so much due to a belief in Santa Claus, or the traditional year-end rally attributed to old St. Nick, but because the market is very oversold right now.

Stocks became extremely oversold in November before managing only a brief bounce in early December. Then even more selling set in. Stocks in my view are way overdue for a bigger bounce, and Santa Claus is just the jolly old gent to bring one -- stay tuned -- and have a very Merry Christmas!