December 22, 2011 / 8:28 PM / 7 years ago

What will Santa leave in Wall Street's stocking?

NEW YORK (Reuters) - Wall Street may not be on Santa Claus’s list for presents this year.

The “Santa Claus rally” refers to the seasonal tendency for equities to gain in the final five trading days of the year and first two trading days of the new year.

Since 1969, the S&P 500 has gained on average about 1.6 percent during those seven trading days, according to the Stock Traders Almanac.

This year, the period runs from Friday, Dec 23. through Wednesday, January 4.

Some traders, however, are betting on a lump of coal in their Christmas stockings this year, suspecting that any malaise will be due to debt-stricken Europe, the source of so many disappointments this year.

“I don’t buy into the whole Santa Claus thing this year. There were some bulls setting up for it but there is just too much news, too many headlines that can throw you off, “ said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

“I think you should be on guard all the time because we could be getting anything, like a downgrade on sovereign banks, any moment,” he said. “If you are playing (the Santa Claus rally), it’s a dangerous game to play.”

Warnings from major credit rating agencies on a potential downgrade of several European nations has kept investors on edge. After Standard & Poor’s back in August surprised financial markets with a downgrade of the United States’ triple-A credit rating on a Friday evening, investors worry a similar move could come at any time - even between Christmas and New Year’s.

The correlation between U.S. stocks and European sovereign bond yields remains high, so a negative headline out of Europe could hit the U.S. market.

Brown Brothers Harriman data to 1928 shows that stocks have traded higher 78 percent of the time during the year-end period, with an average gain of 1.8 percent. That compares with an average gain of 0.2 percent during any seven-day period since 1928, and a 56 percent chance of being higher.

When the market slips, however, the market suffers for months.

“In the 12 times the S&P 500 fell at least 1 percent during the Santa Claus rally, the index subsequently averaged a 1.9 percent loss during the first quarter of the new year,” said Ari Wald, equity strategy researcher at BBH.

It could also be argued that the Santa rally came and went a bit early this year, with the one-day, 3 percent rally on the 20th accounting for all of what was to come.

Reporting By Angela Moon; Editing by Leslie Adler

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