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December Stock Market Rally Is in the Cards

NEW YORK ( TheStreet) -- The benchmark S&P 500 Index may rebound in December from this month's rout, according to historic trends. But Europe's debt crisis could spoil things this year.

Since World War II, the S&P 500 has had the best average monthly performance during December, with an average increase of 1.8%. That's two times better than the average for all months.

"Knowing that history is a guide, never gospel, it could be a bad month this year, but history also hints that if we have a bad November, we traditionally have a good December," says Sam Stovall, chief equity strategist at S&P Capital IQ.

Historically, the S&P 500 has advanced 77% of the time in December following a decline in November. The index is down about 5% this month, with the last day being tomorrow. Stocks are little changed today.

Another historic trend that supports the theory that the market will post gains this December is the fact that the S&P 500 hasn't declined in the third year of a president's term since 1939. The benchmark index is down 3.4% this year, so that loss would have to be erased in December.

Investors burned by a volatile market may be less inclined to trade on historic trends. In fact, the S&P 500 has declined 22 times in December since 1929, with the biggest drops in 1930, 2002, 1937 and 1931.

Stovall warns that the situation in Europe remains a risk to the rule of thumb that December will advance after a decline in November. "The wild card remains Europe, and the rest of the globe is hostage to the European activity," he says. "For the market to advance in December, we would have to hear something out of Europe that they are coming to a resolution."

Looking ahead to 2012, Stovall employs a strategy of holding both cyclical and defensive companies in his portfolio. He is favoring cyclical stocks -- those that are closely tied to the economy -- as he expects an improvement in the U.S. He recommends overweighting consumer discretionary, consumer staples and technology, and underweighting financials and telecom services.

A double-digit increase in the S&P 500 next year isn't out of the realm of possibility for Stovall. He estimates the index will climb to 1,360 next year, a 14% increase from today. If the U.S. begins to show more growth, the market could fare even better.

-- Written by Lindsey Bell in New York.

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