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Santa Clause Rally: Call It A Success

The Santa Claus rally, whereby stocks tend to rise in the last five trading days of the year and the first two of the new one, is now over, and by any stretch this has been a successful run.

In the last seven days, the S&P 500 has risen 7.4 percent, surpassing the modern “best” of 7.2 percent in 1974. Jeff Hirsch at the Stock Trader’s Almanac tells me that we have to go all the way back to 1932, when the S&P rose 7.5 percent, to beat the gains we have seen at the end of this year.

There have been many positives in the past week and a half:

1) No selling into rallies (today's down move is very modest)
2) New lows fade
3) Volatility trend has been down
4) Sector rotation: less defensive names have outperformed

The last point is the most important. Look at how energy, consumer discretionary, and material stocks--all groups associated with expanding economies--have outperformed more defense groups like consumer staples and healthcare:

Sectors (last 7 days)

Energy up 13.2%
Cons. disc. up 9.8%
Materials up 7.8%
Consumer staples up 4.4%
Healthcare up 3.8%

Bears, of course, argue this is a bear market rally, an oversold jolt, and they may be right. But the tone is much different than a month ago.

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