Do You Believe in a Santa Claus…Rally?

You may not believe in Santa Claus but what about a Santa Claus rally? The market theory developed years ago by my friend Yale Hirsch of Stock Trader’s Almanac presumes that the market tends to rise at the end of the year as an influx of funds come into the market as people try to complete trades and make adjustments for tax purposes, receive year-end bonuses, etc.

Whether the work of the jolly man from the North Pole or not, what is true is that stock markets have historically performed well in December. Going back 20 years, the S&P 500 and the Dow are up 1.79 percent and 1.69 percent, respectively, on average during December. In fact, the S&P 500 has posted negative performance during December only four times during the last 20 years; six times for the Dow.

According to a Marketwatch story from last year, the average return for all non-December months since 1896 is 0.5 percent. Overall, December ranks as the third-best performing month for markets behind June and July.

Historically, the Santa Claus rally spans the last five trading days of the year and the first two of the next, according to the Stock Trader’s Almanac. But this year Santa came early. As of market close on Wednesday, the S&P 500 was up 4.63 percent for the month, and the Dow was up 4.1 percent. Will the strong month continue?

With consumer sentiment more positive than it’s been in years and clarity coming from Washington regarding the Bush tax cuts and unemployment benefits, we believe the market’s momentum should continue through the Christmas holiday and into the New Year.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

• Become A Funded Futures Trader