Cool Yule: Why stocks are a great bet this week
While lightened volumes due to Christmas could make for extra volatility, the market's seasonal bias strongly suggests that investors should bet on stocks this week.
"It's going to be a merry Christmas for everyone—if they're long equities," predicted Anthony Grisanti of GRZ Energy. "I definitely think this week, the market goes higher. Five out of the last six years, the market rallies into the last two weeks of the year."
The historical statistics are compelling. Looking at the performance of the S&P 500 from December's post-Christmas trading sessions through the second session of January, the market has posted a 1 percent gain on average, rising 71 percent of the time.
The trend also looks good in a slightly longer-term context. If one bought the S&P on Dec. 20 and sold it on Jan. 7 (or the subsequent day on which the market was open) one would have enjoyed 17 winning trades over the past 20 years, for a total return of 337 S&P points on the trade.
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The phenomenon is known as the "Santa Claus Rally," though that term technically refers only to the generally positive performance of stocks in the last five trading days of the year and the first two of the new year. The trend was discovered in 1972 by Yale Hirsch, the creator of the Stock Trader's Almanac.
So what explains the bullish bias?
"The main cause is that a lot of individuals are doing holiday things, leaving the pros alone on the floor, or what used to be the floor. And they have a tendency to pick up a lot of things after tax-loss selling is over," explained Jeffrey Hirsch, the editor in chief of the Stock Trader's Almanac (and Yale Hirsch's son).
In other words, once investors finish selling off losers to avoid paying capital gains tax on winners, professional traders see an opportunity to snatch up stocks at bargain prices. "You see a big professional buying spree," Jeffrey Hirsch told CNBC.com.
But Jim Iuorio advises eager traders to exercise a bit of care.
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"I think it's time to be cautious, because of increased volatility and low volumes. We've seen wicked moves in the week of Christmas before," said Iuorio, the managing director of TJM Institutional Services. "So I would probably trade a little more cautious than usual."
Yet Iuorio added that "stocks have the green light—so I would be long."