The Coming Week: Cheered On

With precious little economic or earnings news to distract equity investors, the holiday spirit could live on next week, in keeping with tradition.

Over the past 53 years, stocks have rallied an average of 1.5% in the last five trading days of the year and the first two in January, according to the Stock Traders Almanac. Traders and portfolio managers often buy in late December, ahead of an expected bounce in January, when Christmas bonuses are put to work and investors contribute to 401(k) plans and other retirement accounts.

"Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet respectable rally," the Almanac notes. "Santa's failure to show [however] tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices."

Last week, the Dow rose to a three-and-a-half-year high, and the S&P 500 moved above the 1200 level for the first time since August 2001, as oil prices declined and health care stocks like Pfizer(PFE) stabilized after plunging the week before.

Paul Desmond, president of Lowry Research, thinks the momentum is strong enough to carry stocks higher next week and through the first half of January.

"As different indexes have broken out to new highs, a lot of institutional investors that have been sitting on the sidelines have been forced back into equities," he said. "There's a strong tendency to realign portfolios before the end of the year, and we think there's going to be strong upward pressure."

While Desmond is bullish heading into 2005, he does expect some pullback in mid-January when fourth-quarter earnings and preannouncements are released.

Although there are no corporate earnings of note due out next week, a few economic releases are on tap, including a report on consumer confidence for December. Although sentiment readings aren't always closely correlated with consumer spending, traders will look at the data for some insight into the holiday shopping season, which has been underwhelming so far.