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Santa may skip Wall Street this year

The usually upbeat December stock market could turn out to be downright frigid in '07.

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By Alexandra Twin, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Sing it with us: "You needn't watch out. You might as well cry. You might as well pout I'm telling you why. Santa Claus ain't coming to town."

Somehow it's not as catchy as the original. But it could be accurate this year.

A year-end rally, which has become something of a rite on Wall Street, could be off the table this year due to the myriad woes investors are facing. From the credit crisis to concerns that consumer spending is flagging, there's little incentive for Santa to touch down this year.

Tuesday's menu included the Federal Reserve's dour 2008 economic outlook, Freddie Mac's cash crunch and oil at a record near $100 a barrel.

"I wouldn't bet on the typical November and December advance unless the consumer shows that we have incredible buying power in there," said Paul Mendelsohn, chief investment strategist at Windham Financial Services.

"The market is now looking toward 2008 and a slowdown, and I find it hard to believe that we can have a year-end rally," Mendelsohn added.

But hey, there are some reasons why Wall Street might see a typically upbeat December and an end of the year "Santa Claus" rally.

"An end of the year run is not necessarily off the table," said Art Hogan, chief market analyst at Jefferies & Co. He said that Wall Street still needs to work its way through a lot on the financial side. Yet, the broad selloff of recent weeks may have primed stocks for a bigger bounce back, particularly in the areas of the market that are unaffected by the credit market mess.

"But there's no question of volatility," he said. "It's going to be very bumpy through the end of the year."

December is typically the second best month of the year on Wall Street, according to the Stock Trader's Almanac, with the fourth quarter also the best of the year. The S&P 500 and the Dow industrials have seen an average gain of 1.7 percent during the month since 1950. For the Nasdaq, December has been the No. 3 best month since the tech average's inception in 1971.

This is explained in part by a couple of seasonal factors. Often, stocks struggle in September and October and start bouncing back in November. That advance continues on and off through at least January, with December often the peak.

The strength can be attributed to everything from good holiday cheer, to the impact of year-end dividends and bonuses, to the tendency of small cap stocks to finally join the fourth-quarter advance by around mid-December, according to the Almanac.

Then there's the "Santa Claus" rally, which encompasses the last five trading days of the year and the first two of the new year.

That rally occurs more regularly than the broader December rally, as was evidenced in a terrible 2002. A three-year bear market was coming to an end, but not soon enough to lift stocks in December, which turned out to be an unusually weak month. However, Wall Street managed to limp higher in that end of December to early January period. Santa Claus still showed.

Will this year follow a similar trajectory as 2002, sliding in December overall, but managing a little run at the end of the month?

It's certainly possible.

"I think we're going to have a tremendous amount of volatility and basically stay in a trading range until we get information on first-quarter earnings," said Dan Genter, president at RNC Genter Capital Management.

Douglas Roberts, chief investment strategist at Channel Capital Management, said that there will be a slow grind higher, but that any advance will be limited by the run up in oil prices.

"It's going to be a painful process, so much so that people don't realize it's actually moving higher until we finish out the year," Roberts said.

The bad news out of the financial sector will continue to flow, and on the days that it does, the market will take a hit, said Chris Johnson, chief investment officer at Johnson Research. But select stocks will outperform the rest of the market, he said, particularly in technology.

Robert Loest, portfolio manager at Integrity Funds, said that a late December rally could depend on what the Fed does on Dec. 11.

"If they don't cut rates, expect to see a bloodbath," he said. "Even if they do cut, but it's only by a quarter-point, you could see selling anyway."

He said a half-point cut would help the investor sentiment. That and some good news out of retailers after the start of the holiday shopping period this weekend. To top of page

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