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Best ETFs for the Santa Claus Rally

One of the best known seasonal events on Wall Street is the Santa Claus Rally. The event occurs from just before Christmas Day to just after New Year’s Day. Investors consider price gains during this period as Santa’s gift to equity markets. The event is more than a guy in a red suit coming to town. Influencing factors include upbeat investor sentiment, lighter trading volumes, encouraging economic news, bullish reports by investment dealers highlighting prospects for the following year, expectations for strong fourth quarter earnings triggered by news of strong consumer holiday spending and the investment of year-end bonuses. In addition, selected equities, which have over-reacted to tax loss selling pressures, frequently rebound from bargain prices.

The Santa Claus rally is the strongest three week period of the year for U.S. equity markets. Thackray’s 2012 Investor’s Guide notes that average return per period for the S&P 500 Index from December 15th to January 6th during the past 61 periods was 2.0% percent. Profits were realized in 46 of the past 61 periods. Returns from the NASDAQ Composite Index were jollier. Average return during the past 40 periods was 3.0%. Profits were realized in 31 of the past 40 periods.

Conditions for a Santa Claus rally this year are favourable. Key U.S equity indices began to recover last Thursday thanks to a series of favorable economic reports. Special economic influences in play this year include stimulative fiscal and monetary measures and the proposed extension of the payroll tax cuts until the end of February. In addition, portfolio managers, who have been holding large cash positions during most of 2011, will be chasing performance near year end by committing remaining cash positions. Also, end-of-year tax loss selling pressures by individual investors following a year of lower stock prices in 2011 are expected to trigger a jolly good rebound.

A wide variety of investment choices are available with a history of outperforming the market during the year-end rally period: Best performing sectors include Small Caps, Utilities, Home Builders, Metals & Mining and Health Care. Exchange Traded Funds with exposure to these sectors include iShares Russell 2000 Index (Symbol: IWM $72.26), Utilities SPDRs (Symbol: XLU $34.54), SPDR S&P Homebuilders Index (Symbol: XHB $16.13), S&P Metals & Mining (Symbol: XME $48.88), and Health Care SPDRs (XLV $33.41). Equivalent ETFs, that trade in Canadian Dollars, include iShares Russell 2000 Index Canadian Dollar Hedged (XSU $15.64) and BMO Equal Weight U.S. Health Care Hedged to CAD Index (ZUH $16.69).

Don Vialoux is the author of free daily reports on equity markets, sectors,
commodities and Exchange Traded Funds. . Daily reports are
available at
http://www.timingthemarket.ca/. He is also a research analyst for
Horizons Investment Management Inc. All of the views expressed herein are his
personal views although they may be reflected in positions or transactions
in the various client portfolios managed by Horizons Investment Management.

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