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. Last Updated: 07/27/2016

Early Start to Santa Claus Rally

NEW YORK -- Do you believe in the Santa Claus rally?

For several decades, stocks have risen in the seven or so sessions following Christmas. With enthusiasm running high on Wall Street, analysts say this year should be no exception.

Of course, stocks have been on an upward path for weeks. It appears Santa arrived earlier than usual, analysts say.

"The Santa Claus rally used to kick in right after Christmas," said Brian Belski, chief investment strategist at George K. Baum and Co. "Then it started right before Christmas, and this year, the gains have really come on strong since Dec. 1."

The rally has little to do with holiday cheer. December is the time for mutual fund managers to polish their portfolios for the end of one year and position themselves for hefty gains in the next.

The year-end rally actually has its roots in October, when many individual investors and money managers shed stocks that fell during the year in order to record tax losses. Meanwhile, institutional investors dump shares that haven't performed well as they begin dressing portfolios for year-end reports.

That wave of selling contributes to October's reputation as the worst month on Wall Street. In a bear market, an October sell off can leave Wall Street in a lingering funk. But in a bull market, investors are often unwilling to stay on the sidelines for long.

Instead, investors flush with their own year-end bonuses and capital gains leap back in, making December the best month of the year for the Standard & Poor's 500 index, with an average gain of 1.7 percent, according to the Stock Trader's Almanac.

The Santa Claus rally is responsible for a fair portion of those gains, notes Yale Hirsch, editor of the almanac. Since 1952, the S&P 500 has risen an average of 1.6 percent in the last five trading days of one year and the first two sessions of the next year.

Sometimes the gains are even more spectacular. In 1997, after a troubled summer and fall, the index jumped 4 percent during those crucial seven days.

This year, analysts see little likelihood that stocks will slump at the end of December. Interest rates are stable, the outlook for corporate profits is strong and worries about Year 2000 computer bugs are waning, although analysts warn that any technical difficulties could prompt a steep sell off in early January.

"The Nasdaq and the S&P have been rallying for a long time because they're dominated by technology," said Richard McCabe, chief market analyst at Merrill Lynch and Co.

The best scenario for investors, McCabe said, would be a rally in the large segment of the market neglected in recent months by investors extending their tech-stock shopping spree.

"There's some possibility that an end-of-year rally could lift some of these stocks that have been down and depressed," he said.

Last week, the Dow Jones industrial average rose 32.73 points. A gain of 12.54 Friday left the blue-chip index at 11,257.43, although in late trading the Dow surged up to 11,383.74, well above its high close of 11,326.04, before slipping back.

The Nasdaq composite index once again out-performed other market measures, rising 132.83 during the week. The index rose 38 Friday to close at 3,753.06, the 25th record high close in the past seven weeks.

The S&P 500 gained 3.99 during the week. The index rose 2.25 Friday to close at 1,421.03.

The Russell 2000 index of smaller companies slipped 0.50 for the week. A gain of 0.95 Friday left the index at 466.21.

The Wilshire Associates Equity Index, which represents the combined market value of all NYSE, American and Nasdaq issues, ended the week at $13.25 trillion, off $3.85 billion from last week. A year ago, the index was $10.82 trillion.