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Why Traders Doubt Santa Rally This Year

Bob Pisani is off; this post was written by CNBC producer Robert Hum.

Children are eagerly awaiting Santa’s arrival tomorrow night…but traders will be waiting to see if Jolly Ol' Saint Nick brings more gifts on Monday — the typical start to the so-called Santa Claus Rally.

Traditionally, stocks have risen during the last 5 trading days of the year and over the first 2 trading days of January. According to the Stock Trader’s Almanac, since 1969, the S&P 500 has risen an average of 1.6 percent over that 7-day period — certainly a nice little boost at the end of the year. The last 2 years have given investors a nice bounty, too — in 2008, the S&P jumped 7.4 percent during the Santa Claus Rally, and last year the index moved up 1.4 percent over the 7 days.

But many traders are a bit wary of a nice Santa Claus rally this year — mostly since the markets have already had a solid run-up here in December. Also concerning traders…volumes have lightened up and volatility has faded, with the CBOE Volatility Index (VIX) at an 8-month low.

So how significant has the market’s rally been in December so far? As previously mentioned, with a 6.5 percent gain so far this month, the S&P is on pace for its best December since 1991. Moreover, it’s also the best December performance for the index heading into Christmas (from December 1-December 24) since 1987, when the S&P rose 9.4 percent in December leading up to the Christmas holiday.

The glimmer of hope for traders…despite the strong December rally so far, it is not out of the realm of possibilities to see an extension of the current rally headed into the end of the year. Since 1969, the S&P has risen 5 percent or more in December heading into Christmas on 4 different occasions. In each of those 4 years, the S&P still managed to have notable Santa Claus rallies that year.

Dec 1-24 Rally Santa Claus Rally:

1971 +7.2% +1.3%

1987 +9.4% +2.2%

1991 +6.4% +5.7%

1998 +5.4% +1.3%

But with many sectors already at new highs, what could fuel an extended rally over the next week-and-a-half? Traders point to techs — one sector that has noticeably underperformed this month:

Financials up 10.2%

Materials up 9.4%

Energy up 7.8%

Industrials up 7.4%

Techs up 5.3%

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