Will The Grinch Steal The Santa Claus Rally In 2014?

There are many sayings that are used to describe movements in the financial markets. For example, “Sell in May and go away” and the “January Effect” are two of the most common ones.

One that is applicable to the current time period is the “Santa Claus rally.” This is best described as a strong move to the upside that occurs between Christmas and the New Year. However, many users of the saying apply it more broadly to include the entire month of December.

With the wacky year in the markets coupled with its recent volatility, is there a chance the Grinch will steal the rally in 2014? Let's examine eight possible reasons that may hinder the anticipated rally.

Related Link: Have Gold ETFs Finally Turned?

1. Unpredictable Ebola

Most of this year's gains have occurred since the Ebola lows, which caught many investors off guard. From a technical perspective, this is not the healthiest technical formation and a retracement to test the true validity of the rally would not be out of the ordinary.

2. Defensive Big Money

As of late, the big money has been getting very defensive. In other words, money has been flowing out of the momentum stocks with high price-to-earnings ratios and into value stocks. This sometimes signifies that a pullback might be on the horizon and by being invested in issues that pay a dividend, those dividends may help lessen the blow in a down to flat market period.

3. Chasing The Benchmark

Many money managers are underperforming the market in 2014. Since many are chasing the benchmarks this late in the year, a solid performance this year will speak volumes when looking to retain current investors or attract new ones. Therefore, some may want to lock in gains for the year and close the books for 2014 ahead of time.

4. Crude Oil

Big oil, which is a major component of the S&P 500 Index, does not appear to be turning around any time soon. The beat down in the crude oil market will surely hurt earnings in Q1, and it is yet to be determined how it will affect their entire 2015 performance.

5. Interest Rates

Will interest rates continue to move lower or be flat for all of 2015? Cautious investors may lighten the equity portion of their portfolio while the “getting is good” and re-allocate to investments that will perform better in a rising interest environment, as opposed to being forced into the re-allocation when the Fed finally lowers the boom.

6. Gold

What is the gold market trying to say? Often part of the re-allocation process will favor a move into the precious metals and other commodities. With the recent $100 rally in gold, some will argue a long-term bottom may be in place. Once again, a rally in gold sometimes signifies market turbulence may be on the horizon.

7. Quadruple Witching

Quadruple witch expiration takes place on December 20 this year. On many occasions, the trading activity surrounding that event signals a change in trend. With a strong rally in place this quarter, the unwinding of positions may induce a blow-off top and signal lower prices in Q1.

8. European Union

Some recent gains in the market have been predicated on Mario Draghi implementing his version of quantitative easing for the European Union. If the Germans continue to drag their feet and the plan is aborted, fears of a continued recession overseas may have a negative effect on the U.S. markets.

Of course, the reasons for a decline in the market are not always apparent to the naked eye. It may be some exogenous event that is not mentioned here that will hinder a Santa Claus rally.

Until the gifts are opened from under the Christmas tree, who knows what will happen.

Image credit: Orange County Archives, Flickr