Investors awaiting Santa Claus
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
Thursday’s 421-point gain in the Dow Jones Industrial Average and 48-point gain in the Standard & Poor’s 500 was nothing short of spectacular, as investors piled back into the market fearful of being left behind, particularly as we draw closer to the end of the trading year and time period known for the Santa Claus rally.
The Santa Claus rally is defined in the Stock Trader’s Almanac as the last five trading days of the year and the first two of the New Year, when the S&P 500 has rallied on average of 1.5 percent over the 7-day period. Yale Hirsch discovered the phenomenon in 1972, and many value his discovery more as an indicator of the coming year. In those years when Santa fails to show, meaning the S&P 500 closes lower over this 7-day period, the following year tends to be a bear market or at least a year when stocks could be purchased at lower prices later in the year.
Over the past 20 years Santa has failed to show four times (1994, 2000, 2005 and 2008) and each of those years, the S&P 500 was either flat or down on the year. The annual return of the S&P 500 during those years was as follows: 1994 down 1.5 percent, 2000 down 10.1 percent, 2005 up 3.0 percent, 2008 down 38.5 percent. So it’s been said, “If Santa Claus should fail to call, bears may come to Broad and Wall.”
However, the stock market’s gains on Thursday were significant for a second reason, and that was its divergence from the price of crude oil. That’s right, the price of crude oil fell and the stock market went up. The financial media has been reporting over the past weeks how the stock market’s declining was due to falling oil prices, but that thesis now seems to be somewhat faulty. On Thursday, the S&P GSCI Crude Oil index closed over 4.2 percent lower while the S&P 500 rose 2.4 percent higher on the day. It appears the stock market is ready to go higher with or, in this case, without the price of crude oil.
With the S&P 500 higher by 1.27 percent over the past five trading days, convertible bonds have been along for the ride. This week’s top-performing bond index is the Barclays U.S. Convertible Bond index, gaining 1.02 percent over the past five trading days.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.