Why Market Cliches Were Good Advice This Year

They are the cliches that make the investment world go 'round—those maxims and expressions that are supposed to neatly sum up market behavior based mostly on the calendar or other fairly arbitrary measures.


For some, they represent the worst in market mentality, sending investors to positions based not on fundamental truths but instead on superstitions that stem from coincidence.

But they also all have one thing in common this year: They've all been right, every last one.

From the "January Effect" to "sell in May and Go Away,"  investors who latched onto some of Wall Street's favorite expression fared quite well despite the year's zany volatility.

The only question left for 2011 is—you guessed it—whether Santa Claus will bring a year-end rally.

"This has been the year of the stock market cliche in that all of the time-worn axioms based on the calendar actually were worth following this year," Jeff Kleintop, chief market strategist at LPL Financial, said in an analysis.

Kleintop ran through the gamut of market chestnuts:

  • The "January effect" saw markets rise in the market's first month and in particular its initial five trading days, foretelling a modest full-year gain for the Dow industrials.
  • "Sell in May and go away" was the trade of the year, allowing investors to pocket a 9 percent gain through April, then get out of the way as the market just missed a full 20 percent bear-market drop that persisted through the end of September.
  • October is not normally a great stock market month, but its reputation as a "bear killer," meaning that it does perform well when the market is in or near bear territory, held up well. Stocks were on pace for their best month ever before a late-month selloff still produced a more than 10 percent gain.

So what are the prospects for a Santa Claus rally?

In its strictest sense, the term refers to gains experienced in the week between Christmas and New Year's. But many traders have come to use the term colloquially for any surge that happens around the holiday season.

And hopes for December are high, whether measured by the 45-31 bull vs. bear percentage spread in the latest American Association of Individual Investors poll, or through anecdotal hopes that a gradually recovering U.S. economycan drown out the peril of the European debt crisis.

Kleintop sees a rebound in investor sentiment on hopes that Europe will straighten out its mess; an improved job market; and a better-than-expected holiday shopping season as potential "Santa" catalysts.

"A year-end 'Santa Claus rally' may cap off a volatile year of modest single-digit returns for stock market investors," he wrote. "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."

Looking for more more cliches?

"Window dressing" is another being tossed about, in reference to the pressure fund managers will feel after missing out on the October rally to make sure their portfolios look poised to get in on the action.

"Not withstanding a total meltdown in Europe, the underlying fundamentals in the United States seem to be improving. That means any money manager who wants to show any kind of a year-end profit needs to pick up securities," says Michael Kresh, president of M.D. Kresh Financial Services in Islandia, N.Y. "Window dressing is going to be so much more significant this year than it has been in a while."

One more to throw on the heap: The period ahead is generally regarded as "the best six months of the year" for U.S. stocks, according to the Stock Trader's Almanac.

Sam Stovall, chief equity strategist at Standard & Poor's, says that may be true, but investors should fine-tune their portfolios to take full advantage.

Specifically, he says industrials and materials far outperform the market in the November-through-April period, while consumer staples and health care outperform the S&P 500 during the May-through-October run.

"If the flow this year mimics that of other years, it may be better to adopt a more cyclical mindset, despite the planet's present plethora of perplexing problems," Stovall wrote in a note for clients.

To be sure, there are doubters that a Santa rally is in the works.

They say the familiar trend won't hold this year because there are too many obstacles, specifically from Europe.

"I'm skeptical on that one," says Michael Cohn, chief market strategist at Global Arena Investment Management in New York. "What are the odds that anything gets resolved? Virtually slim to none. So uncertainty reigns. Everyone's not going to say, 'Screw uncertainty, let's take the market up a lot.'"

Instead, Cohn advises investors to be patient while the debt crisis plays itself out and add positions gradually and only on pullbacks.

"When this whole thing is over it'll be the end of a 13-, 14-year bear market cycle. You'll have forever and a day to get into this market," he says. "We're nearing the end. We're much closer to the end than everybody thinks."