Bad Santa

Many investing pundits try to give you gifts for the holidays in the form of stock advice. But most of it is worse than a lump of coal. Here's one we read the other day:

"Stocks tend to post solid gains during the last five trading days of the year and the first two days of the following year posting an average gain of 1.6% during that period since 1969, according to the Stock Trader's Almanac."

This supposed seven day magical sleigh ride, known as the Santa Claus rally, begins today. Advice like this is even worse than the knit socks your aunt Martha gives you for Christmas every year. Because it can lose you money.

First, this little tidbit isn't exactly secret information. It's widely talked about, which means even if it ever had any power, it's too pervasive by now not to be priced in to stocks already.

Second, there's no good reason to believe it's true other than a few random statistics. This isn't real economic research, it's called "data mining". A few journalists will offer vague logic like "Managers are dressing up their portfolios with winners for year end." But statements like that are even less logical. As we've said many times before, buying any market-priced asset based on its past performance is downright treacherous.

Lastly, trying to time stock prices within the span of a week or a few days is tantamount to gambling. It's been proven many times that in such short stints in the markets are essentially a random walk.

But let's just say you go for it and get that 1.6% gain. After transaction costs, we'd bet you're up less than a percent and you might even lose money on the deal.

Keep this in mind when you hear about similar myths like the "Super Bowl Rally" and so on. People giving you this kind of advice aren't just bad Santas, they're Grinches.