2 Things We Need for a Santa Claus Rally

12/19/2011 6:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

With so many waiting for the Santa Claus rally, MoneyShow's Jim Jubak explains the historical pattern in the stock market, and what he thinks it will take for stocks to finish the year strong.

You can just about feel everybody waiting for the Santa Claus rally. The market just keeps talking about it—everybody really wants it to happen.

For it to happen there are two things that have to occur, but first let’s talk about what the Santa Claus rally is. It’s a pattern that’s existed for a long number of years, stretching all the way back to 1950. It’s not a really big period, and it’s not a really big rally.

It really is defined as the last five days of a year and the first couple of days of January, the first couple of trading sessions. Going to back to about 1969 or so, this period has produced a 1.6% gain on average.

So it’s an uptrend, and it’s a pretty decent trend. If you’re a trader and you leverage it, it could be significant. But I think in a year like this, when the market has been down and up and down and up and now it’s down, down, down, I think you get people putting more weight on the Santa Claus rally than that 1.6% average return really can bear.

You get a lot of people hoping that it’s going to save their year. Well that’s not enough to save a year. But anyway, let’s go and talk about what has to happen for this to occur this year. Two things, I think.

One is we have to have Europe go away. We’ve got to not essentially solve the crisis, but we’ve got to get it off the front burner. We’ve got to go from a position where we are thinking about, well, the Euro is going to dissolve or the European banking system is going to fail.

While that’s going on in people’s heads, we’re not going to have a Santa Claus rally—we’re not going to have any kind of a rally. That’s gotta get off the front burner so we can sort of watch to see whether that happens.

The second thing is you’ve got to have some hook, if you will, to hang the rally on. Something good has to be happening in the US economy. There, I think what we’re looking for is better-than-expected numbers about the US economy.

The only numbers that we’re really going to get in this period are going to be retail sales. They were kind of disappointing when we got November retail sales in the first week in December. They weren’t up as strongly as people had been hoping for, but part of that was because we had an upward revision of the month before, so the change from October to November was kind of damped down.

Maybe we’ll get the next numbers. Weekly numbers is all we’re going to get in this period, but you know we’ve got a good chance for that.

We’ll get things like...more e-commerce numbers. We had a 20% bump in e-commerce sales announced on December 14. That kind of anecdotal stuff might be enough to get people’s animal spirts charging for the end of the year, if we can get the Euro debt crisis to just simmer down for a while.

Related Reading:

These Small Cap Plays Are in Season
Europe Becomes the Lever of the World
Why the US Is Sending Oil Overseas

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