The Santa Clause Rally & January Effect

Posted by Ryan Irvine: Keystocks

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Market Buzz – ‘Twas the Night Before Christmas (close enough…)”

The Toronto Stock Exchange finished Friday with a 50 point gain on holiday-volume, leaving it up about 290 points on the week. Having said this, the index’s rise still leaves it with a long way to go to reach the close of 13,371.20 on Dec. 23, 2010.

The benchmark S&P/TSX composite index is still more than 1,400 points, or over 10%, below the level it was a year ago.

But at this time of year, our thoughts, and the thoughts of the market, tend to turn to the holidays. We leave you with the following bit of prose.

‘Twas the night before Christmas, and all through the brokerage house,

Not a trader was stirring, not even a mouse;

All portfolios repositioned by the advisors with care,

In hopes that a sustainable rally soon would be there;

The clients were restless, fed-up in their beds,

While visions of positive returns danced in their heads;

And mamma with her calculator, and I in my cap,

Had just looked at our statement, and broke out into rap,

When there on the TV there arose such a clatter,

I sprang from my calculations to see whom I could batter.

Away to the set I flew like a flash,

Stepped on a skateboard and tripped over trash.

The reporters on CNBC so cheery and upbeat,

Made me sick to the stomach as I fell from my feet,

When, what to my frustrated eyes should appear,

But Fed Chairman Bernanke, and eight empty beer,

With a swig and a wink, so lively and quick,

I thought for a moment, “Who was this old prick?”

More rapid than eagles, his stimulus it came,

And he coughed, and wheezed, and called them by name;

“Now, QE 1! now, QE 2! now, QE 3 and More!

On, Apple! on Intel! on McDonald’s and Ford!

To the top of the index! There’s nowhere left to fall!

Now rally away! Rally away! Rally away all!”

And I heard him exclaim, as he drove out of sight,



Loonyversity– The Santa Clause Rally & January Effect

The oft-spoken-of Santa Claus Rally refers to a surge in the price of stocks that can occur in the week between Christmas and New Year’s. There are numerous explanations for this phenomenon, including tax considerations, a generally jovial mood around Wall Street (Christmas bonuses), and the fact that the pessimists are usually on vacation this week.

Many consider the Santa Claus Rally to be a result of people buying stocks in anticipation a rise in stock prices during the month of January, otherwise known as the January Effect, which many postulate is the result of excessive tax-loss selling up until Christmas Eve.

For its part, the “January Effect” is a tendency of the stock market to rise between December 31 and the end of the first week in January. The January Effect occurs because many investors choose to sell some of their stock before the end of the year (early to mid December) in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in the market, causing stock prices to rise. Although the January Effect has been observed numerous times throughout history, it is difficult for investors to profit from it since the market, as a whole, expects it to happen and therefore adjusts its prices accordingly. Having said this, savvy investors can find some potential opportunities in the lighter traded small-cap market.


Put It To Us?

Q. What factor, more than any other, will help me accumulate a sizable RRSP?

– Sadie Barry; Calgary, Alberta

A. Besides subscribing to our research, both for income and small-cap stocks, start early. The earlier you start, the more you’ll have when you retire.

The key to a accumulating a big-time RRSP is growth – growth through contributions and growth through investment earnings. The longer your money is invested, the more it will grow.

Here’s an example:

With a $100 per month contribution, at 8% return per year:

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