The investing game has plenty of rules.
Some are iron-clad. Some are flexible. Some are sensible — and some are dumb.
For a discipline based on rational thought, an amazing number of irrational superstitions persist.
We’re talking about hokey advice like ‘sell in May and go away’, ‘the market always crashes in October’ and ‘don’t buy on the 13th of the month’.
A lazy stockbroker will parrot these theories to you as gospel. An equally lazy one will dismiss them out of hand. A curious adviser will examine them.
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The US stock market is going great guns. Stateside share prices are hovering near record highs — but the Aussie market is looking a little wobbly.
That makes now an ideal time to test the grandest superstition of all — one that could help you make up all the gains you’ve won and lost since January…
We had a coffee earlier this week with our colleague Shae Smith. You’d know Shae from her work on Money Weekend, Pursuit of Happiness and Tech Insider.
When we asked Shae how she spent her weekend, her answer was simple. Christmas shopping!
Christmas seems to creep earlier every year. But as Santa Claus comes to town, the annual Santa Claus stock market rally could be just around the corner.
Over the years, December has been a good month for stocks. Since 1929, the US S&P 500 [INDEXSP:INX] index has posted a positive monthly return more than 70% of the time. But investors usually see the biggest market jump on the last five trading days of the year and the first two of the new year. That’s how the year-end rally came to be associated with Santa.
The mainstream media thinks the Santa rally starts right on Christmas Day. But the truth is that it can kick in any time from mid-November.
The Santa effect has moved the Aussie markets too. The S&P/ASX 200 [ASX:XJO] index has risen 28 out of the last 34 years from mid-December to mid-January.
If traders see a greater than 80% chance of the market rallying into year-end, you can expect to see some strong buying ahead of December. That factor alone could push Australian stocks higher over the next few weeks — particularly after the market has blown off some steam this week.
Regardless of whether you think the markets will follow the pattern this year, the Santa rally can become self-fulfilling. Investors afraid of missing out buy stocks based on this factor alone. And at the big end of the market — when pro investors swing big lines of stock — fund managers window-dressing their books for end-of-year reporting can add to the feeding frenzy.
The thought of easy profits is exciting. It can put a rocket under small-cap stocks, which trend hard when buying pressure swells. And if you’ve picked good quality companies before that price action fires up, you can intercept big gains.
But whenever you hear the words ‘easy profits’, stop for a moment. The markets just don’t work that way…
Bang for your buck
People love short-cuts to wealth creation. And a blindly superstitious buyer of the Santa rally over the past few years would be full of holiday cheer.
But we don’t buy or sell blindly. We are either in the market or out of it based on the underlying fundamentals.
And there’s a fundamental reason to stay bullish into 2015. In fact, the same factor has pushed stock markets to giddying heights for years now.
We’re talking about the vice-like grip that the world’s central banks have on asset prices. The world is awash in a sea of freshly printed easy money. That sea won’t dry up any time soon.
You may have heard mainstream financial pundits proclaiming the end of the bull market on the strength of the US Federal Reserve tapering off its asset purchases last month.
But that was so well-signposted that investors factored it in months in advance. And the Fed has just passed the baton to other central banks, which have and will keep the easy money rolling…the Bank of Japan, the European Central Bank and the Bank of England.
You don’t have to agree with these policies. You might even see them setting us up for a monumental fall.
But you owe it to yourself to act in your family’s best interests while the bankers keep the markets under their thumb.
That means you should recognise that any stock market dips should be relatively short-lived…and to get the best bang for your buck, you should buy ‘hated’ sectors that will rise most as sentiment improves.
That means buying small-caps, resource stocks, and growth companies in the tech sector.
History shows that the market may well rise as the fat man in red comes to town…but as bureaucrats keep doing their best to fiddle with share prices, the medium-term outlook for stocks looks promising too.
Cheers,
Tim Dohrmann,
Editor, Money Morning
The post Get Ready for a ‘Santa Rally’ in Stocks appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
