The Stock Trader's Almanac

[3xBuBu]

Santa Claus is Coming to Town
http://www.thebullandbear.com/articles/2006/1206-santa.html
By Jeffrey Hirsch,
Stock Trader's Almanac Investor

The Santa Claus Rally is scheduled to start on December 22 and run through January 3. We normally experience a brief, yet respectable, rally from the last five trading days of the year through the first two of the New Year. The S&P 500 has averaged a 1.6% gain during this seven-day span since 1969.
It is important to remember that when this reliable seasonality has failed to materialize, it has often been a harbinger of bear markets or sizeable corrections in the coming year. However, years after failed Santa Claus Rallies proved to be times stocks could have been purchased later in the year at much lower prices. Such occasions provide opportunities. Yale Hirsch (founder of The Stock Trader's Almanac) discovered this phenomenon in 1972. We have alerted investors to this ominous portent for decades with the mnemonic device, "If Santa Claus should fail to call: bears may come to Broad & Wall."
This rhyme was certainly on the mark in 2000, as the period suffered a horrendous 4.0% loss. On January 14, 2000, the Dow started its 33-month 37.8% slide to the October 2002 midterm election year bottom. Nasdaq cracked eight weeks later falling 37.3% in ten weeks, eventually dropping 77.9% by October 2002. Saddam Hussein's invasion of Kuwait cancelled 1990's Santa Claus Rally. Three days later, on January 9, 1991, the S&P 500 had dropped 3% one week before the onslaught of Gulf War I. This created a triple bottom.
Energy prices and Middle East terror woes may have grounded Santa in 2004. Corrections and gyrations ensued in early 2005, keeping the averages mixed with a Dow loss and single-digit S&P and Nasdaq gains. Previous absent Santa Claus Rallies in 1979 and 1981 preceded bear market lows in the following years of 1980 and 1982 respectively.
Less bullishness on last day is due to last-minute portfolio restructuring. Pushing gains and losses into the next tax year often affects year's first trading day. This indicator is most effective when confirmed by a down "First Five Days" and a down "January Barometer".
Devised by Yale Hirsch in 1972, our "January Barometer" states that as the S&P goes in January, so goes the year. The indicator has registered only five major errors since 1950 for a 91.1% accuracy ratio.
The last 35 up "First Five Days" were followed by full-year gains 30 times for an 85.7% accuracy ratio and a 13.7% average gain in all 35 years. The 21 down "First Five Days" were followed by 11 up years and 10 down making (less than 50% accurate).
Bullish 4-Year Election Cycle forces have given this indicator a 12-2 record in Pre-Election Years.
Editor's Note: Jeff Hirsch is editor of Stock Trader's Almanac Investor, John Wiley & Sons, 111 River St., Hoboken, NJ 07030, 1 year, 12 issues, $299.
Data courtesy of Stock Trader's Almanac 2007 (Wiley, 0471783773, $34.95) a must-have investment tool with a wealth of information organized in a calendar format. It alerts readers to little-known market patterns and tendencies that help investors forecast market trends with accuracy and confidence. Wiley books are available at your local bookstore or by calling 1-800-225-5945. In Canada, call 1-800-567-4797.