The Santa Clause Rally and January Effect

Posted by Ryan Irvine - Keystone Financial

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Market Buzz The Investor’s Christmas

‘Twas the night before Christmas, and all through the brokerage house,
Not a trader was stirring, not even Madoff that louse;
All portfolios repositioned by the advisors with care,
In hopes that the strong rally would continue to be there;

The clients were restful, snuggled tight in their beds,
While visions of ten-baggers danced in their heads;
And mamma with her calculator, and I in my cap,
Had just looked at our statement, no longer a piece of crap,

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 the 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 half-glazed eyes should appear,
But U.S. Treasury Secretary Geithner, and eight empty beer,

With a swig and a wink, so lively and quick,
I thought for a moment, “Who was this young prick?”
More rapid than eagles, his bailouts they came,
As he trumpeted, and boasted, and called them by name;

“For, Bear Stearns! For, AIG! Cash for clunkers and more!
On, GM! On Chrysler! But nothing for Ford!
To the top of the index! This liquidity’s a ball!
Now rally away! Rally away! Rally away all!”

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

LooniversityThe 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.


Put it to Us?

Q. My discount brokerage offers a “DRIP” program. Does this differ from traditional DRIPs offered by the companies themselves and how does it work?

– Ronald Mah; Calgary, Alberta

A. Many discount brokerages now offer their own “quasi DRIP programs”. Under these plans, your broker automatically reinvests dividends from eligible companies in new shares. Rather than incur a full commission, you are charged a minimal fee ($1.00 – $3.00). Essentially, this method eliminates the need for you to register and store your own certificate, making the process more convenient.

For those new to the wonderful world of DRIP investing, a brief explanation is in order. With DRIPs, the dividends that an investor receives from a company (stock) go toward the purchase of more stocks, making the investment in the company grow little by little.

The “dripping” of dividends is not limited to whole shares, which makes these plans somewhat unique. The corporation keeps detailed records of share ownership percentages. For example, if ABC Big Co. paid a $1 dividend on a stock that traded at $10, every time there was a dividend payment, investors with the DRIP plan would receive 1/10 of a share in ABC Big Co. Another feature that makes DRIPs popular is that there are no commissions or brokerage fees involved because the investor deals directly with the company.

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