Santa Rally Arrives Late

What we are witnessing is a delayed Santa Claus rally. The volume was thin but the breadth was very good. All major sectors participated in this rally.

Now these kinds of seasonal events are indicated by some of the anomalies I talked about yesterday. The January Effect is a well known anomaly. As more people follow it and become aware of it, such rallies have a self-fulfilling prophesies. If you want to profit from the January effect you need a systematic startegy to do so. If you are looking for ideas on how to profit from this once a year phenomenon study this article by Victor Niederhoffer and Laurel Kenner. They offer a template for identifying which stocks to buy using the Value Line.


January Effect

Whether it be the last month of the year, or the last week of the year as a precursor to the January effect, it is hard to deny that the season of bullishness is imminent.

The Speculators took out pencil and envelope to ascertain exactly what the year-end tendencies are regarding animalistic spirits for the last 10 years. The results show two distinct patterns:

* The S&P 500 ($INX) index has closed up nine times out of 10 in December over November. The Nasdaq Composite ($COMPX) doesn't climb as often -- just 67% of the time -- but, when it's up, it climbs with greater ferocity. In January, the roles seem to be reversed -- while the S&P 500 index is up over December an appreciable 78% of the time, the Nasdaq is up a more consistent 83% of the time -- and with higher returns to boot.
* The first week of January shows real optimism, with investors sending the Nasdaq 100 ($NDX.X) up by an average of 1.25% -- more than three times the rate of the S&P 500 index. It would seem that as the slates are wiped clean, investors are willing to give risk a chance and a sense of optimism yields a spring in the step in the middle of winter.

The results suggest that a pairs trade long the Nasdaq 100 and short the S&P 500 would be appropriate as of the end of November. But the Speculators eschew a pairs trade as an equivalent to betting on a favorite to show in a horse race.

Unless you are prepared for it, you can not profit from it.