Investors hope for a Santa Claus rally as Dow soars 337 points
Don’t count on the Santa Claus rally.
Investors head into the final few weeks of 2011 with optimism that Wall Street can gain enough momentum for a sprint to the finish. That was the case Tuesday when the Dow Jones industrial average surged more than 300 points, marking its best performance all month.
The gain, however, might be yet another symptom of the market’s continuing volatility, in which major stock gauges surge one day only to plunge the next. Since December began, the Dow has changed directions on eight of 14 trading days.
That has led some analysts to believe that the fabled Santa Claus rally, in which big institutional investors use the final days of the year to scoop up bargains, won’t develop this year. The market has participated in the year-end rally six of the last 10 years.
Bond guru Bill Gross of Newport Beach-based Pimco warned his nearly 50,000 Twitter followers that the rally was not likely to extend beyond Tuesday’s big gains. His advice: “Prepare 4 record cold winter.”
Not all analysts are so bearish, but the seesawing of stock prices in recent weeks has made it hard to predict that any move in stocks will last more than a few days.
“Why should I believe that any strong up-or-down move is anything other than noise anymore?” asked Howard Simons, a market strategist with Bianco Research.
Although Tuesday’s gains helped make up for losses the Dow sustained earlier in the month, they do not bring the blue-chip index back to the level it was two weeks ago. The highs hit in July and April are still more than 500 points away.
The Dow rose 337.32 points, or 2.9%, to 12,103.58. The broader Standard & Poor’s 500 index ended up 35.95 points, or 3%, at 1,241.30. The Dow is up 4.5% from where it began the year, but the S&P 500 is still down 1.3%.
Another pattern this year is that big rallies have been quick to fade as traders seize the chance to sell stocks and lock in gains. Trading volume also has been light, which tends to skew index movements and increase volatility.
For the moment, global markets have grown optimistic as a series of positive economic reports helped overshadow Europe’s sovereign debt crisis.
On Tuesday, investors were buoyed by data that showed German business confidence unexpectedly rose during December. That damped fear that Europe’s biggest economy might be dragged into a recession.
Meanwhile, Spain’s successful auction of short-term government debt generated hope that the continent is gaining traction on the crisis. Investors have been worried that Europe is struggling under big debts that could make it hard to borrow more money on the bond markets.
“Europe is single-handedly driving this market either way,” said Peter Boockvar, an equity strategist at Miller Tabak & Co.
In the U.S., a stream of good economic signals continued Tuesday with a report from the Commerce Department showing that home builders started new homes at a faster pace in November than in any month since April 2010. This led to some suggestions that the long-suffering housing market may have turned up from the bottom.
“That has been the one real anchor that has been around the neck of this economy for three or four years,” said Randy Bateman, chief investment strategist at Huntington Capital Corp. “To see some positive coming out of that has significant ramifications.”
Investors now turn their attention to other key data points due out this week, including Thursday’s release of third-quarter gross domestic product data and the Thomson Reuters/University of Michigan consumer sentiment index.
Bateman said the optimism could easily vanish in a single day. But if it doesn’t, he’s holding out for a Santa rally sighting.
“I think we’ll see some more buy-in to this rally, and it can indeed be a Santa Claus rally,” Bateman said.
