Will The Stock Market Get A Santa Claus Rally?

With only three days to go until Christmas, investors are now hanging their hopes on a visit from Old St. Nick.

But will Santa Claus arrive in time to reward them?

Let’s hope so since it’s hard to imagine that 2009 could be as bad as 2008 turned out to be. After all, the bullish argument for equities has to start somewhere.

From Reuters by Leah Schnurr entitled: Stock investors hope Santa touches down

“Investors could do their holiday shopping on Wall Street this week as bargain-basement prices for stocks and optimism over efforts to fight the year-long recession may prompt a year-end rally.

But not even a Santa Claus rally to end the year can rescue 2008 from going into the books as the worst for stocks since the Great Depression, thanks to the body blow delivered by the housing market slump, credit crisis and, finally, recession.

With just seven trading days left, the benchmark S&P 500 index is down 39.5 percent for the year, on pace perhaps to match Wall Street’s second-worst year ever, 1937, when the S&P also plummeted nearly 39 percent. Should no rally develop next week, 2008 could well challenge 1931 - when the S&P crashed 46 percent - for the mantle of Wall Street’s worst-ever year.

That said, the slump in stocks has left them relatively cheap. And analysts are now more optimistic that unconventional recession-fighting efforts such as the Federal Reserve’s big interest-rate cuts may soon gain traction.

“You’re getting a lot of people picking through the wreckage of this year and doing some selective buying,” said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois.

Volume is expected to be light in a week shortened by the Christmas holiday and an early close on Christmas Eve.

The buying spirit tends to visit Wall Street nearly every year, “bringing a short, sweet, respectable rally within the last five days of the year and the first two in January,” according to the Stock Trader’s Almanac.

Santa’s appearance on Wall Street has been good for an average 1.5 percent gain since 1969, according to the Almanac, while the absence of such a rally tends to precede times when stocks can be bought at much lower prices.

“A lot of people are wondering whether they’ll get a Santa Claus rally,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

“Clearly, this is not a normal year, but just the fact that you have history on your side around the New Year’s holidays can only be called a positive.”

That being said, Santa better hurry.

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