Looking out for Santa

BY all accounts UK households are digging in for a frugal Christmas this year. Surveys from research groups like retail specialist Verdict predict that, with the threat of rising mortgage rates and tax increases in 2010, shoppers won&rsquo;t be feeling too jolly this festive season, and spending will drop year-on-year for the first time on record. <br /><br />However, traders might want to take advantage of a well-known trading tradition to give your finance a little pre-Christmas boost &ndash; the so-called Santa Claus Rally. Of course, plenty of sceptics suggest the winter trend is nothing more than investing mythology and say that October is statistically a better month. Certainly there is little agreement as to when this rally is supposed to take place.<br /><br />The traditional definition is that the rally takes place only in the final trading week of the year &ndash; that means you should buy shares on the first trading day after Christmas and take your profits on the second trading day of January. But others suggest you should be piling in around 12 December, when the market has been noted to regularly hit a low, and hanging on until well into the New Year.<br /><br />There&rsquo;s plenty of historical evidence to suggest there are gains to be made in the approach to 2010. According to Yale Hirsch, who first wrote of the phenomenon in 1972, the one-week traditional rally delivers gains in excess of December as a whole two-thirds of the time. He reckons it&rsquo;s been good for an average 1.5 per cent gain on the S&amp;P since 1969. <br /><br />Meanwhile, Simon Thompson, author of best-selling investment title Trading Secrets and companies editor at the Investors Chronicle, favours a slightly longer timeframe, and with seemingly better results. He notes that over the past 27 years, the FTSE All Share has risen between 11 December and 5 January 23 times, with an average gain of 2.6 per cent. It&rsquo;s interesting that several of the 21 seven-day rising streaks in the history of the FTSE 100 have come during December. <br /><br />MAJOR CORRECTION<br />But could 2009 be one that Santa skips? Weak markets over the last few trading days have many thinking that we&rsquo;re about to see a major correction after the spectacular gains over the last nine months, as the market loses its appetite for risk.<br /><br />US investors were disappointed last year when the Grinch pilfered their Christmas rally. But if Santa Claus fails to deliver his investment goodies again this year, that may present another opportunity in itself &ndash; namely that 2010 could see the market move into bear territory once again. As Yale Hirsch said: &ldquo;If Santa Claus should fail to call, bears may come to Broad and Wall.&rdquo;