In keeping with the holiday tradition of looking at investing at year end, today we will take a peek at the Santa Claus Effect. This phenomena occurs generally in the last five business days of the year and possibly into the first two days of next year. It breaks down basically into the stock market will have a small rally of about 1-2% and the year generally ends or starts on a happy note.
Why is this the case? One theory is that it is due to the re-allocating of funds and stocks for the large investment houses, their mutual funds, their 401Ks, etc. As I’ve talked about before, fund managers sometimes adjust at year end to give the impression that they were in great stocks instead of Consolidated Home Debt Incorporated. Fund managers only give snapshots of what is in their portfolios at different times of the year and sometimes they turn around and sell whatever it is they bought right after the New Year.
How can we turn this into a profitable stock transaction? First, I need to remind you that I am not a financial expert. The advice I am suggesting is for you to take, do your own due diligence (that means do your own legwork please in research) and come to your own conclusions.
If there is a stock, bond or sector that you have been watching and it has been particularly hammered of late (and honestly, you can throw a dart on a wall with company names and probably pick one that would fit but do your own research anyways just in case), you might see it get a little bit of a pop in the next few days. Remember that the operative word in the sentence that Kim just wrote is “might”. Past performance, as the pundits say, does not guarantee future results when it comes to investing.
There may be a lot of lousy news coming out that supersedes the generating of the Santa Claus Effect. There may be some sort of international act of terrorism or a natural disaster and that may turn your best laid plans into best laid losses. If that happens, if you have picked something that you don’t mind either holding onto or are ready to cut and take your loss, you are okay. If not, I would not suggest you try this as a short play.
For something like this, you take your pop of anywhere from 1-2% and close out your position. You will have made, if it works, 1-2% for maybe a week’s worth of time. Not bad in ANY market, is it?
The important thing to note to is don’t be a hog. My motto is “Pigs get fat, hogs get slaughtered.” You will notice that this particular strategy may not work and it may not even be applicable due to the current state of the economy.
If you try and stick around after you’ve made your pop, be prepared for sticking around a long time. Earnings will continue to come out and most of them are what you would expect – lower profits, lower expectations and like in the case of Toyota in their future estimates, no idea of what kind of money they will make next quarter leave alone next year.
My personal take too is that with everybody screaming how much further we have to fall, that generally tells me that we might be near a bottom or at least a level of resistance, at least till we have the inauguration. Who knows. Like I said, I am not an expert and I won’t hide behind charts or graphs that sometimes can be interpreted to mean entirely different things to two different readers. Remember that some Santa Clause Effects have different results than others as well.
Have a great holiday everybody and when in doubt, stay in cash!!
If you are looking for a day job, part time work, suggestions for saving money or investing, please check out my book listed below. Part of all the proceeds from the sales of that book go to Rett Syndrome research. One girl is born with Rett Syndrome worldwide every fifteen minutes. My daughter Arianna has Rett Syndrome and we are working to do all we can to make her life easier and find a cure in her lifetime. Boys born with the Rett gene generally die at birth.
Kim Isaac Greenblatt
Santa Claus Effect and the Stock Market
Tags: Business, investing, Santa Claus Effect, stock market