With the FTSE 100 drifting lower over recent days, it certainly doesn’t feel like Christmas euphoria is intoxicating the stock market.
However, it’s not too late for a Santa rally to build up. According to stock market lore, a surge in the price of shares often occurs in the week between Christmas and New Year’s Day.
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Why can it happen?
Theories abound to try to explain the Santa Claus Rally phenomenon. Some folks put it down to tax considerations, others to happiness around the City. Then there are those that believe people might be investing their Christmas bonuses, or that fund managers could be ‘window dressing’ to make their funds look stuffed with winning shares, or that the pessimists are usually off work for the week!
None of the reasons offered seem to add up to anything of much substance, so I won’t be making the probability of a Santa rally part of my investing strategy. However, if we do see a seasonal uplift, it could be a good opportunity to do some portfolio rearrangement – perhaps selling some underperformers into the spike, or taking profits on some winners, or taking time to rebalance holdings to equal weight across a share account.
Is it too much to ask for a Santa rally?
2015 has been a tough year for many sectors represented in the FTSE 100 index. For example, there has been the carnage in the commodities sector, the ongoing upset with the supermarkets and continuing headwinds for banks – many shares have either plummeted or drifted down all year. The problem for investors with an interest in the FTSE 100 is that the fortunes of several big companies skew the outcome for the index.
Cyclical firms account for around 50% of the FTSE 100 and the banks and commodity companies are among the largest market capitalisations in the index – even now. That means a Christmas rally is heavily reliant on the resurgence of oil firms, miners and big banks. My view is that firms in those particular sectors may continue to struggle through 2016, so I’m not holding my breath for a convincing Santa rally this year.
So what?
Even if a Santa rally fails to develop, it doesn’t matter if we keep a long term investment horizon in mind. In fact, it’s to our advantage if share prices are weak because we can buy shares cheaper, with the possibility of better value.
That said, my feeling is that 2016 will shape up as a stock picker’s market. It always is, of course. But the problems for some sectors during 2015 underline why it’s so important to do our own research and thinking before buying shares in any firm – even big ones in the FTSE 100.
It can pay to dwell long and hard before committing funds to the stock market, and I’ll be looking for companies that display three things simultaneously:
1) Quality business models and attractive profit metrics.
2) Value in terms of not being too expensive as measured by ‘price-to’ multiples. And…
3) Momentum in as much as there is an up-trend present on the share price chart.
