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Contributors What the Santa Claus Rally Could Tell us About 2012
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Some are calling it the most important election ever.

Given the immense challenges our country is facing, there’s no question next year’s election will be key to the future of America. In the short-term, the election will also be important for stocks.

You see, the stock market tends to follow certain seasonal patterns.

You’ve probably heard about “sell in May and go away”. That is perhaps the most famous seasonal pattern on Wall Street. It refers to the tendency of the stock market to decline from May to September.

It has been very consistent throughout the years. This year was no exception. The market fell 17% during that period. That’s why it’s important to follow these seasonal patterns.

Looking ahead, the next major pattern to consider is the coming presidential election year.

Since election years have been great to investors, a lot of people are optimistic about next year. But as I will show you, there’re good reasons to be cautious…

Why the Stock Market Loves Elections

The last two years of any presidential mandate tend to be great for stocks. According to the Stock Trader’s Almanac, the market has climbed by an average of 13.6% per year for each of the last two years of an administration since 1832.

The reason is simple: the incumbent party always tries to stimulate the economy during the last two years in order to win votes and secure re-election.

So many investors hope 2012 will turn out to be a great year for stocks. But if you blindly follow this seasonal pattern, you can end up in a world of pain.

There are a couple red flags to consider.

Every Rule has Exceptions

This year, the stock market is down by about 3%. So, unless we have a massive rally until the end of the year, this will actually turn out to be a bad year for stocks – against the trend. To the trained observer, that’s the first red flag.

Another red flag is the fact that 2011 is literally looking a lot like 2007. Take a look at the daily chart of the S&P 500 below. In 2007, stocks dropped below its 200-day moving average (blue line) and failed to cross above it. That’s exactly what’s going on right now.

Let’s also keep in mind that 2008 was an election year. I probably don’t have to remind you that investors suffered one of the worst bear markets on record that year, in spite of the election.

Bad News: 2011 Looks A Lot like 2007

Pleaes click here to view larger image

If Santa Doesn’t Show Up this Holiday Season…

So how can you tell if 2012 will actually turn out to be a horrible year? Well, it’s impossible to know for sure. But in the short-term, there’s another seasonal pattern that gives us clues.

I’m talking about the Santa Claus rally. Stocks tend to rally during the last five trading days of the year and the first two days of the New Year.

Since 1950, this seven-day rally has resulted in an average gain of about 1.5%. More importantly, when there’s no rally, the next year tends to be a bad year for stocks.

In 2007 for example, the market went down 3% during those seven trading days. The following year turned out to be the worst election year ever for the stock market.

So if Santa Claus doesn’t visit the stock market this Christmas, 2012 may turn out to be a lot like 2008.

Opportunities to Profit

But for the Sovereign investor, that’s an opportunity for profit in the Forex market.

The dollar has been moving in the opposite direction of the stock market. So if stocks fall, the dollar will rally.

You can easily profit from that by buying the dollar against currencies that are more volatile, such as the Australian dollar and the Mexican peso.

So if Santa Claus doesn’t show up this holiday season, 2012 may turn out to be a good year for the greenback.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert and Currency Capitalist

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