End-of-year rally came early and may prompt a sell-off
NEW YORK » Forget about the traditional Santa Claus rally on Wall Street, and get ready for the Christmas correction.
Some market watchers are warning that economic uncertainty will torpedo a record run in stocks, and that it's only a matter of time before the implosion begins. Investors have largely ignored these admonitions, giving negative news an upbeat spin and sending stocks higher.
There's consensus building that this stock frenzy might be setting the market up for a December surprise. Out goes the year-end rally investors have gotten used to, and in comes the long-awaited stock market retreat.
"There's an overall bias to be bullish out there, but the seasonal patterns of being more negative in September and October just didn't hold true," said Bill Strazzullo, chief market strategist for Bell Curve Trading, which uses market technicals to advise hedge funds and institutional investors.
"So, that means you can't trust any of the seasonal patterns," he said. "We're in the last leg of the rally, and people are going to want to take their profits and take a step back."
Indeed, October, known for seasonal slumps and historic stock market crashes, handed Wall Street its biggest gain all year. The month traditionally sees about 46 percent of the Standard & Poor's 500 declining. This time around only 23 percent fell, and the index itself advanced 3.2 percent.
And the market hasn't let up so far in November, hitting new record highs this past week. But Wall Street observers like Strazzullo believe the S&P 500, now at 1,380.90, could test 1,450 within the next few weeks before falling back -- and that the rally that has steadily built since July will suffer a sharp decline in December.
Even the bulls aren't expecting a stellar performance next month.
Milton Ezrati, economic and market strategist at money manager Lord Abbett & Co., still feels the fundamentals on the market "look really good" and will likely rise from here and into 2007. However, he won't be surprised if investors begin to take profits, leaving December with gains below usual levels. Since 1926, the month has an average of 52.3 percent of the S&P components in positive territory, and traditionally posts the biggest returns all year.
"I wouldn't be surprised to see a correction," Ezrati said. "I don't see any particular seasonal push. Usually, the rally occurs in the last month-and-a half of the year. We've sort of pre-rallied."
The S&P 500 gained 5.61 percent in September and October, and so far this month has added another 0.23 percent. Last December, the S&P got a late start to the year-end rally -- falling 0.1 percent that month but roaring back with a 2.6 percent advance in January. In 2004, the index surged 5.1 percent in December.
Many on Wall Street agree money will be taken off the table next month; the size of the correction might hinge on how upbeat consumers feel during the holiday shopping season.
"We're all going to be focusing on Christmas sales, and we'll be watching the first weekend in December as a bellwether," said Alan J. Brown, head of investment for London-based Schroders. "The possibility that you could see the consumer retrench significantly more than we've experienced to date is still out there for me.".