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Net Net: Promoting innovation and managing change

Happy Halloween often means ho-ho-hum Christmas

Santa Claus rally on the way?

October's stock market treats could be December's tricks, at least if end-of-the-year historical trends hold up.

After a brutally volatile year, equities have soared this month, with the up nearly 8 percent as of Monday trading. That has brought the broad stock market gauge just into positive numbers for 2015 and more than 11 percent off its low back in August.

Such violent rallies often come with a price, though: In this case, it's a tendency to follow such big shows with lackluster second acts.

Sam Stovall, U.S. equity strategist at S&P Capital IQ, said market participants should get ready for some Christmastime coal after Halloween candy.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

"With the market having mapped out an October price-gain trajectory that would make NASA proud, investors are wondering if this surge will steal from the traditional strength exhibited during the final two months of the year," Stovell said in a note to clients Monday. "Well if history is any guide, for it's never gospel, a strong performance in October typically has resulted in a substandard performance for the final two months of the year."

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While the calendar says Halloween has not hit yet, this is around the time of the year when investors start wondering whether a so-called Santa Claus rally is in the cards. The term specifically refers to the trading period between Christmas and New Year's though it sometimes gets lumped in with December's market in general.

The October rally does not bode terribly well for a holly, jolly holiday season.

Stovall pointed out that an October rally in excess of 7 percent in itself is a rarity, occurring just five times since World War II. The typical market performance for the rest of the year was a 1.9 percent gain, compared to the usual 3 percent rise in November and December the other 70 times.

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Moreover, average market performance for the final two months has been better when October has been down, with positive Octobers leading to 2.3 percent gains the rest of the way and losses during the month historically generating an average S&P 500 rise of 3.4 percent.

"In other words, Santa has found that a lump of coal in his trick-or-treat bag increased the odds of [a] pleasant surprise in his holiday stocking," Stovall said.