Is 'Santa Claus' rally in cards for Wall Street?

NEW YORK — The stock market has been nice to investors in 2013 — setting another record high Monday — and Santa Claus is likely to deliver even more presents in the coming week, if history is the guide.

Investors got an early gift Monday as the Dow Jones industrial average jumped 73.47 points, pushed by a 3.8% surge in Apple stock.

The "Santa Claus rally" is more than a catchy phrase. It's a real-world seasonal trading phenomenon.

Historical performance data confirms that Santa often comes to Wall Street this time of year, "bringing a short, sweet, respectable rally" in the final five trading days of December and the first two sessions of the new year, according to the Stock Trader's Almanac, a Wall Street trading bible.

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In the seven-session span since 1969, the Standard & Poor's 500 stock index has posted average gains of 1.6%. That's a sizable return in such a short span, given that cash is paying 0% interest and a 10-year U.S. government bond will pay you a tad less than 3% over a full year, or 365 days.

What explains the gift of profits around the winter holiday season?

For one, market moves are exaggerated by thin holiday-season trading, Jessica Hinds, a market strategist at Capital Economics, explained to clients in a strategy note titled, Markets likely to end 2013 on a strong note.

Both a lack of players trading stocks and less cash coursing through the market, she says, magnifies price swings. What's more many professional investors that had been betting on stocks going down by selling borrowed shares with the hope of buying them back at a lower price, a strategy known as short selling, often buy back those shares "to square their books."

Hinds says those drivers will again play a role and likely give stocks a boost in the waning days of 2013.

"After all," Hinds wrote, "the Federal! Reserve's announcement that it will start to taper its monthly asset purchases (in January) has removed some (market) uncertainty. And the sanguine response so far may discourage bears from clinging to their short positions."

Hinds adds that the fundamental backdrop for stocks heading into 2014 is supportive, thanks in large part to a still-easy Fed.

However, a word of warning: When the Santa Claus rally fails to materialize, history says there is a heightened chance of a bear market, or a sustained period of falling stock prices, according to Almanac editor Jeffrey Hirsch.

A 4% drop in the key period in late 1999 and early 2000, for example, marked the start of a 33-month, 37.8% dive for the Dow Jones industrial average, according to the Almanac. Similarly, a 2.5% drop during the seven-day span beginning in December 2007 led to the second-worst bear market in history.