Sunday, November 26, 2006

Santa Claus Rally?

I hope that everyone had a pleasant Thanksgiving holiday. Now we look forward to the time of the 'Santa Claus rally'. One has to wonder whether there will be such a rally this year since the markets have been in pretty high gear since July for the S&P 500 and the Dow and since August for the NASDAQ.

Often, though not always, the markets show a pattern related to earnings and earnings announcements. Many companies operate on a financial calendar basis and close their quarters in March, June, September, and December. The month following the close of the quarter is ordinarily the month during which most earnings announcements are made. The time during which those announcements occur is often one of great excitement in the market. Traders anticipate earnings announcements and one can often see the prices of individual equities elevate as the announcement approaches and we also often see the whole markets move upward during these times of anticipation. Once earnings have been announced, however, there is usually little corporate news left so the excitement is somewhat drained from the markets. Those down times are frequently found in May, August, and February. During 2006, we did see declines in February, May, and August. There was a only a slight decline at the beginning of November this year, but the markets then took right off once again.

Right now it's hard to say whether the rally will just keep right on going or whether we will have some kind of retracement before year end. Oftentimes selling for tax loss purposes will occur during the first couple weeks of December and the last two weeks of December will enjoy the so-called Santa Claus rally. I suspect that will be the case again this year, but only time will tell. The economic news and corporate earnings reports have been very positive for some time. Some economists are predicting a bit of an economic pullback (are they ever right?), and the newsletter writers have attained new bullish levels which often is a precursor for a market reversal. Only time will tell. The bulk of my positions remain bullish, but as I commented recently, my finger is on the trigger so that I can react quickly to a reversal if it occurs. Meanwhile we might as well enjoy the directional move while we can.

Bill Kraft, Editor
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