How to Trade the ‘Santa Claus Rally’

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The Dow Jones Industrial Average advanced to a new two-year high yesterday, gaining for the 10th time in 11 sessions. Blue-chip stocks led the broad market with financials the strongest performing sector, up 1.6%.

Financial stocks started strong following the takeover of Chrysler Financial by Toronto-Dominion Bank (NYSE: TD ) for $6.3 billion. Bank of America Corporation (NYSE: BAC ) rose 2.9%, and JPMorgan Chase & Co. (NYSE: JPM ) was up 2.6%. American Express Company (NYSE: AXP ) rebounded 1.7% after several down days due to the Federal Reserve's proposed investigation into debit card issuers.

Traders seemed relaxed due to reassuring statements from China regarding support of the euro zone's handling of its debt problems, signs of an improving world economy, and a lack of economic and corporate news. Volume is light as the Christmas holiday approaches, and many traders have already taken the week off.


In corporate news, Martek Biosciences Corp. (NASDAQ: MATK ) spiked 36% after agreeing to be purchased by Royal DSM. And Adobe Systems Incorporated (NASDAQ: ADBE) rose 6.01% after beating analysts' Q4 earnings estimates and projecting a gain of 10% in 2011. Jabil Circuit, Inc. (NYSE: JBL ) and Paychex, Inc. (NASDAQ: PAYX ) both delivered better-than-expected earnings. But Nike, Inc. (NYSE: NKE ) fell 3% even after reporting Q4 earnings that were 6 cents above estimates.

Treasury yields were off slightly with the 10-year note at 3.322%. The euro fell to a record low versus the Swiss franc, and the lowest level in three weeks against the U.S. dollar. In late trading, the euro was quoted at $1.3096 versus $1.3126 on Monday.

At the close, the Dow rose 55 points to 11,533, the S&P 500 gained 8 points at 1,255, and the Nasdaq was up 18 points to 2,668. The NYSE traded just 810 million shares with advancers over decliners by 2.4-to-1. The Nasdaq crossed 399 million shares with advancers ahead by 2.6-to-1.

Crude oil for February delivery rose 45 cents to $89.82, and the Energy Select Sector SPDR (NYSE: XLE ) jumped to a new two-year closing high at $66.99, up 67 cents. February gold settled at $1,388.80 an ounce, up $2.70. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) gained 0.34 points to 220.8.

What the Markets Are Saying

The traditional "Santa Claus rally" has taken off with gusto as light volume and a trader-controlled market took the Dow, the S&P 500 and the Nasdaq to new closing highs. The new round of buying confirms that the breakout from the November highs is genuine. And this week's surge puts the near-term trend back into the black.

With many absentees on the exchange floors, the lack of institutional volume is obvious. And when this happens, groups that have been under pressure, like the financials, drug stocks, etc., tend to attract bargain hunters. And some sectors that have recently been getting a lot of buyers are taking off with renewed vigor, like the coal group and base metals, both of which broke to new highs with trading gaps a common occurrence. (See the Trade of the Day .)

Traders should check the daily action with their brokers to catch what is hot during the day. Be prepared for periods of sharp profit-taking, and then renewed buying as the markets swing back and forth. Both the S&P 500 and Nasdaq have advanced for 13 of 15 days this month, and volatility has picked up sharply. If you play in this market, you had better be nimble and be content with smaller but more frequent gains since whipsawing will become common.

Santa has arrived with a bag full of toys - just be careful that you don't get run over by the reindeer.

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Stocks

Referenced Stocks: AXP

Sam Collins

Sam Collins

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