Breakout

Don’t Bet Against a Santa Claus Rally: Detrick

Jeff Macke
Breakout

If you took a vacation last week you're coming in to find the S&P 500 almost 4% higher than where you left it. After you get done flogging yourself for missing the rally the only question for traders is whether they missed the entire Santa Claus rally of 2012.

Ryan Detrick of Schaeffer's Investment Research says stocks still have room to move higher. Detrick is a strict contrarian when it comes to gauging the staying power of rallies and sell-offs. Said another way, he wants to bet on the outcome that will disappoint the most people. Right now the masses are betting against the tape.

Volatility remains muted but traders have been piling into puts on individual shares on any rally, according to Detrick. High volumes in put contracts generally indicate bets that stocks are going lower. What's more, sentiment as judged by the American Association of Individual Investors (AAII) survey is showing negativity normally seen at market lows.

Specifically, the November 15th report showed 48.8% of respondents self-identifying as bears. It's the largest percentage of ursine since August 4th of 2011 when the U.S. debt was downgraded and stocks were at the end of an 18% three week slump. Into last week stocks had seen a 9% correction and we're seeing similar levels of fear, Detrick notes in the attached clip.

"To me it's once again overblown," Detrick says, noting that stocks have moved higher for three years despite investors never ending desire to scare themselves out of stocks on every pullback.

The bulls also have seasonality on their side. Eight of the last nine years have witnessed stocks moving higher between Black Friday and year-end, including 2011 when the S&P 500 rallied more than 8%. Past performance has little to do with future results but betting against the Santa rally has been a sucker's play for most of the last decade.

Your bottom line is this: if you want to be short into the holidays you need a better reason than a vague feeling of unease to justify your positioning. History isn't on your side.

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