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Best Year-End Strategy: Invest by the Book

It has been a textbook year. That is, if your textbook is the Stock Trader's Almanac. The old stock market chestnut "sell in May and go away" proved to be good advice this year. But that was not the only old adage of Wall Street traders that worked in 2011 — they all worked.

This has been the year of the stock market cliché in that all of the time-worn axioms based on the calendar actually were worth following this year:

Wall Street sign
Wall Street sign
  • The "January effect" (the market tends to rise in January attributed to individual investors putting money to work after taking tax losses in December) worked this year as the S&P 500 posted a 2.3 percent gain in January.
  • The "January barometer" (stock gains in January often lead to a gain for the year) and the overlapping "first five days" indicator (stocks rising during the first five days of the year indicate a high probability for a gain for the year) have both proven accurate, so far.
  • “Sell in May and go away" (suggests investors sell and avoid the summer months) worked, with stocks peaking for the year on April 29.
  • October, the "bear killer" month (stock market downturns famously end and reverse in the month of October), ended the 19 percent peak-to-trough stock market decline with stocks bottoming for the year on Oct. 3.

If this "year of the market axiom" pattern continues, what comes next? Perhaps a "Santa Claus rally" is in store for December. Markets must still move past the uncertainty of November that includes key policy events:

  • Government transitions in Europe
  • Action by Congress to avoid a government shutdown
  • The super committee proposals to find $1.5 trillion in deficit reduction measures. But then a year-end "Santa Claus rally" may cap off a volatile year of modest single-digit returns for stock market investors.

What may be the trigger for the textbook year-end rise in the market known as a "Santa Claus rally"?

  • A rebound in investor sentiment as Europe takes long overdue actions to avoid a financial crisis;
  • Improvement in the job market as foreshadowed by the recent decline in initial jobless claims below the 400,000 level in recent weeks; and
  • The holiday shopping season surprises by exceeding retail sales estimates, as it did last year.

This textbook pattern of calendar-driven performance by the stock market may mean that the best year-end strategy is to invest by the book.

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Disclosures:

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