Santa Claus Rally


After declining sharply in the first half of the month, the stock market has rebounded, with the Dow Jones Industrial Average moving to new all-time highs. The Dow Transports have also rallied and are now trading less than 1% from their all-time highs. A close above 9,202.84 in the Transports would reconfirm the bullish primary trend, according to the Dow Theory. For now, our buy lists have 91.9% to 97.2% in stocks.

Year-end buying

The month of December is typically strong for stocks. Indeed, large-company stocks have posted a negative total return in only 18 of the 88 Decembers since 1926, and only three Decembers in the last 27.

However, this December certainly did not start well, as the Dow Industrials fell 5% from Dec. 5 to Dec. 16. The dramatic drop in oil prices created uncertainties on the part of investors, who began to weigh the downside of lower oil prices on certain industry segments and foreign economies.

The good news is that the hoped-for Santa Claus rally has unfolded in recent trading, with the Dow Industrials closing above 18,000 for the first time ever and the S&P 500 Index also setting a new all-time high. Investors came back to the market in part because of positive economic data — U.S. GDP growth in the third quarter was revised up to 5%, the strongest in 11 years — and comments from the Federal Reserve Board that allayed fears of sooner and more severe Fed tightening.

From a Dow Theory perspective, it will be important for the Dow Transports to confirm the recent highs in the Dow Industrials by closing above 9,202.84. Fortunately, near-term market momentum appears to be on the side of a bullish reconfirmation under the Dow Theory.

To be sure, the last trading days of the year can often see erratic price action, as typically light trading volume, tax selling, and portfolio "window dressing" by institutional investors can spur large price swings. Thus, investors should be on the lookout for buying opportunities that may occur over the next few trading periods.


With the primary trend bullish and the Dow Transports poised to reconfirm the bullish trend, investors should continue to maintain a positive stance toward stocks as we go into the New Year.

For new buying, two financials on our Focus List, Ameriprise Financial ($137; AMP) and Wells Fargo ($55; WFC), offer attractive opportunities in a sector that should show improvement in 2015.

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