Christmas Rally

The Christmas Rally

Is there really a Santa Claus? You bet!! I trade it all the time and did again today. 12/18/2015. Today I bought WPG (P/E 5.9) and GNW (P/E 3.9) and OUTR (P/E 4.8), all of which fall into being likely Santa rally candidates. You may have noticed that all of these are rally candidates anyway, but they are much more likely to rally between now and January 1 than at any other time of year. Why you ask? Let me see if I can explain this in a coherent fashion.

Over the years I have heard all kinds of explanations for this rally. Most seem to revolve around the thought that people (the general public, us in other words) are all in the holiday spirit and thus can’t see how on earth a stock could possibly go down. I find that very simplistic and was never able to embrace that idea.

We need to remember there is a lot of tax loss selling going on this time of year also, but most of that is done by December 20 because many brokers go on vacation the two weeks of the Christmas and New Year’s holidays. This I think is the answer to why we are having a rally during this time period.

So how would that cause a rally you ask? And I ask how often do you go short a stock or an index? Never?? For those of you trading a 401k or an IRA you can’t go short. Shorting requires a margin account which is not available in retirement accounts. All those accounts can only go long (buy a stock or index fund), they can’t go short. In normal market environments who do you think does most of the short selling? The pro’s and the hedge funds. They’re all out enjoying the barrels of money they made going short while your stock fell into a hole.

Going short requires you to sell the stock by borrowing it from your broker before you buy it back (hopefully at a lower price). If most of these guys (pro’s and hedge funds) aren’t around to short the market, don’t you think the bias would be a little more to the buy side.

If you look back at all stock market holidays you will find this to be true. Presidents Day, Easter, Fourth of July and through the rest of the year it’s always the same. The brokers take a day or two off and the market bias goes long because the big short sellers took a holiday. Unfortunately Christmas/ New Year’s is the only extended holiday throughout the year so take advantage of it as best you can.

Unfortunately nothing is 100 percent guaranteed and there is a possibility we won’t get a rally but the odds are strongly in our favor.

Try to choose the right stocks to start with and even if we don’t get a rally you could still make a little money. The market was down 367 points today but there is still a long list of stocks up for the day. Three of those up stocks I own, MW, ICON and VNCE, all bought as deep value plays recently. I expect to see strong gains in all of these in the next two weeks.

Best of Luck

Dave C

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