David Schwartz: ‘Bah! Humbug!’ echoes amid the rally cheers

Some investors rub their hands with glee as the Christmas rally season approaches. Apologies for sounding like Ebenezer Scrooge, but long experience teaches me not to count my turkeys before they are hatched when it comes to Christmas rallies.

At first glance, the Christmas trend looks strong. My historical research finds the best entry point for a Christmas rally, on average, is December 12. Shares rose from the 12th to the year-end in 31 out of 37 years since 1970. In contrast, the long-term likelihood of a gain in UK shares from December 1-11 is nearer to 50:50.

The chance of success improves slightly to 86 per cent if I keep my powder dry for a few more days and invest from December 21 until year-end. Figures such as these explain why investors have such high hopes for a Christmas rally.

Unfortunately, history also reveals that the positive trend is merely a bull market phenomenon. There were five bear market Christmases since 1970. Prices rose from December 12 to the year-end just twice. So, if you fear, as I do, that a serious correction is now underway, this year’s Christmas trend should be played cautiously.

If you plan to place a wager on this year’s rally, Cantor Index, the spread betting firm, has announced a Christmas gift to punters, a two-point spread for FTSE 100 bets with a December 31 expiry date.

My strategy is to approach Christmas 2007 in neutral mode, holding both “buys” and “sells” in my portfolio. Given my concerns about dicey market conditions, I will only open an upside bet if the price is near a clearly defined support line where previous downturns ended. Any decline below support will be my signal to take a small loss quickly and avoid a potentially more serious punch on the nose.

CSR, the semiconductor manufacturer, is one of my recent buys. Its shares fell by almost two-thirds since peaking 18 months ago. Institutional investors think CSR is a one-trick pony specialising in low-end products for low-end telephones.
Little credit is given to the rest of its product line or to its R&D potential.

With luck, this will soon change. Strategists at Credit Suisse investment bank believe the company is extremely low-priced, relative to competitors. They recently upped their target price to 900, about 50 per cent above current levels. UBS has just issued a buy rating as well, with a target price of 770.

The support line on the graph intrigues me. Drawing support lines is more of an art than a science. There are several different ways to define support for CSR. I elect to focus on the
medium-term support line, currently around 577 pence. From my perspective, last month’s brief dip below this price and immediate recovery is an important positive sign. I suspect prices will not slip below this area in the near future unless there is a broad stock market decline.

I purchased CSR last week when prices approached the support line. Any decisive drop below 577 will cause me to admit defeat and close down my bet.

David Schwartz is a stock market historian