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Signals Favor a Santa Claus Rally


Strategists expect stocks to climb until the end of January.

It may not be just gifts for boys and girls that St. Nick delivers this December. Market pros say we can also expect him to shower investors with good fortune as the year comes to a close.

November through April is historically the strongest period for the stock market. In addition, write the strategists at InvesTech Research, there's a seasonal occurrence that usually provides the higher price -- or at least stability -- through January.

The highlight of this seasonal period: the so-called Year-End or Santa Claus Rally.

Recently, market guru James Stack and his team at Montana-based InvesTech wrote that the Santa Claus Rally is actually supported by statistics. Over the last 40 years, the average gain from November 20 through the end of January has been 4.2%, which Stack emphasizes would be an awesome 23%, annualized.

Considering the entire 80 years of S&P 500 data, only two years witnessed a decline of greater than 10%: 1931 and 1969. Conversely, a number of years have seen exceptional gains: 10 Santa Claus Rallies out of the past 80 years produced gains in excess of 10%. Five of those rallies happened during the grim 1970s.

Several factors contribute to the seasonal strength, Stack says: The holidays are the strongest retail season of the year; companies usually make their annual bonus payments and firms and investors make contributions to retirement accounts; and financial forecasters issue upbeat predictions for the New Year.

There is, of course, no guarantee that Santa will deliver this year, but the historical research is encouraging, says Stack.

"If 2009 follows precedent, we would expect the S&P 500 to be higher on January 31 than it is today," the pro told his clients in a recent research note. "Even if the rally fails to emerge, the loss over these next 10 weeks is usually limited to 2-3%. In the past 40 years, losses have exceeded 3% only four times, in spite of several multi-year bear markets."

Where does Stack see investment opportunity right now?

In his model portfolio, the veteran particularly likes the iShares Russell Midcap Growth (IWP), an exchange-traded fund with holdings like Coach (COH), Heinz (HNZ), and Lorillard (LO).

He favors the iShares Russell 2000 (IWM), an ETF that includes Bally Technologies (BYI), Human Genome Sciences (HGSI), and Palm (PALM).

And he thinks investors could consider committing capital to the iShares Dow Jones US Healthcare (IYH), an ETF with holding like Abbott (ABT), Amgen (AMGN), Medtronic (MDT), and Pfizer (PFE).

Art Hogan, chief market analyst at Jefferies, agrees with Stack that Santa could well provide a rally.

"In our estimation here, there are three things that drive that probability," he told us in a chat this morning. "One, except for the occasional technical bounce in the dollar, we will continue to see that pattern of dollar debasement and inflation hedging in both commodities and stocks. Second, we have under-estimated the ability for the consumer to put in an upside surprise in terms of the holiday shopping season."

Hogan adds, "Finally, the economic data stream continues to be modestly better than had been expected."

In terms of sectors he favors right now, Hogan says he likes consumer discretionary, energy, industrials, basic materials, and technology. He would avoid the financials.

"There are a lot of things that will be difficult for the financials for the balance of this year and for 2010, including the ongoing need to raise capital, the de-risking of business models, and regulatory oversight," he says.

There are multiple risks that could derail the rally this year, of course. We have a cash-strapped consumer suffering with an unemployment rate of 10.2%, up from 6.6% just a year ago. Also, the market has already run up fast and furiously, with the S&P 500 now 66% higher since early March.

Still, Catherine Hetrick, an editor of the InvesTech Research Portfolio Strategy, remains cautiously optimistic that St. Nick will deliver, as he so often has.

"You see seasonal strength over the period," she tells us. "This year, expectations are low and people are nervous about everything. Any positive surprises could drive this market up for a year-end rally."
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