By MoneyMorning.com.au
Small-cap investors: take note! (And other investors, listen up too…)
As Slipstream Trader, Murray Dawes, pointed out last week, Santa Claus is coming to town. Or more specifically (and useful) for you as an investor, the annual Santa Claus market rally looks like it has arrived.
Last week’s market action was huge.
The S&P/ASX 200 index surged from 3,984.3 on Monday to close at 4,288.0 on Friday.
That’s a 7.6% gain in five days.
It was the biggest one-week gain since… just two months ago in October. Between 5 and 11 October the index gained 9.2%.
And that was the biggest gain since… just four months ago in August. Between 9 and 15 August the index gained 7.4%.
The question for investors now is: will the Santa Claus factor make this market rally more sustainable than the last two?
Because each time, following these swift rallies, the market slumped.
Why?
Because of all the bad news – U.S. debt problems, European debt problems, Chinese economic slowdown, and so on. Each of those events dragged the market lower.
Clearly what the policymakers would like is a constant stream of good news.
And maybe they’ve found the solution…
“The IMF [International Monetary Fund] has confirmed that it could raise new funds for onlending from Europe, amid speculation that the European Central Bank might provide money to the Fund that could be used to help Italy and Spain.”
As we understand it, the European Central Bank (ECB) isn’t allowed to lend money directly to European governments.
So, the Europeans need a plan.
A clever and sinister way round this problem is to hand cash to the IMF… on the condition the IMF hand the cash to Italy and Spain. Or any other European nation in the lurch.
That way the ECB can buy government bonds and national governments can keep spending. If the market stops buying government bonds, no problem, the ECB will give more money to the IMF… to give to European governments.
If the ECB, European Union and IMF get away with this scam, it could keep Europe off the front pages for weeks. Of course, it won’t mean the problem has gone away… just that it’s hiding.
But in the short term that will be forgotten about as the Santa Claus rally helps drive the market higher.
You can see how it worked last Christmas:
The market rally started in late November… built momentum through January… before topping out in February. After that, apart from a brief market rally after the Japanese tsunami and earthquake, it was pretty much downhill for the market.
In fact, from the post-tsunami peak to the August low, the market fell 24.3%. That’s not fair, markets should only ever go up…
So even here in Australia, bureaucrats are doing all they can to fiddle with the market. To try and stop stock prices falling. Tomorrow the Reserve Bank of Australia (RBA) meets for the last time before it breaks until the February 2012 meeting.
Will it cut or raise rates? Or just leave them alone?
Who knows?
But whatever, odds are the market has moved into the happy zone. Whatever the RBA does, the happy market will probably look on the plus side… and doubtless send the market higher.
So, does that mean you should jump into the market and ride the Santa Claus rally?
Well, if this was a bull market, then yes. The Santa Claus rally worked a treat every Christmas from 2003 to 2006. But since then… it’s not so good. The market made a small rally in late 2007 before collapsing in the new year.
The same in 2008. Again in 2009. And as we say, even last Christmas the market rally was short lived.
In other words, the Santa Claus rally track record ain’t that hot.
So, rather than putting faith in the big red fella to make you a few bucks, we suggest sticking to what you know. European bureaucrats have shown they’re experts in papering over cracks without actually fixing anything.
And as long as they – and other bureaucrats – keep trying to cover up the real problem, the real problem will keep showing through.
For that reason our strategy stays the same: cash, gold, blue-chip dividend paying stocks… and an exposure to volatile small-cap stocks.
That way, if the rally is sustained, you should still make a bunch of cash but without putting all your savings on the line if the market rally doesn’t hold up.
Cheers.
Kris.
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From the Archives…
How to Profit from the Inevitable Return to Sound Money
2011-12-02 – Kris Sayce
Two Reasons the Market Should Have Fallen…
2011-12-01 – Shae Smith
Ditch Your Investor Pride to Avoid an Investing Fall
2011-11-30 – Kris Sayce
How to Play a Volatile Market for Profit
2011-11-29 – Kris Sayce
No Thanks to Central Banks
2011-11-28 – Kris Sayce
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