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Wall Street to Santa: Please don't forget us

Historically speaking, it shouldn't be like this. Even with U.S. equities notching another win in a quiet, pre-holiday session on Tuesday, they remain in negative territory for December -- and for the year.

The Dow Jones industrials index is down 1.7 percent for the month and 2.3 percent for the year. The small-cap stocks in the Russell 2000 are in even worse shape: down 5 percent for December and 5.6 percent for the year.

December is often a strong month for stocks, thanks to the typical "Santa Claus rally" fueled by a combination of holiday cheer and New Year's optimism. And with 2015 being a pre-election year, market history tells us it should've been a positive one because the incumbent party traditionally does what it can to boost the market and the economy before voters get another say.

Is it too late for a December gift on Wall Street?

The good news: Stocks are bouncing on near-term technical support from the Dow's three-month trading range this week, setting the stage for a possible year-end relief rally.

It's also hard to believe Santa has truly abandoned stocks this year: The market has gained an average of 2 percent in December since 1990, with a positive result 81 percent of the time. Over the last 100 years, the month has been positive for stocks 73 percent of the time.

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Jeff Hirsch of the Stock Trader's Almanac -- which first brought attention to the Santa rally in the early 1970s -- notes that stocks tend to wilt into mid-December before rallying strongly into New Year's Eve (chart above). The rally tends to be strongest in small-caps, which would be good news for the beleaguered Russell 2000.

Hirsch defines the Santa rally as the market's historic strength during the last five trading days of the year and the first two of the New Year. Large-cap stocks have averaged a gain of 1.4 percent over this period.

But the list of recent concerns remains and will surely be remembered once the holiday cheer fades, the calendar flips into 2016 and those holiday shopping bills come due.

They include the start of the Federal Reserve's first policy tightening campaign in a decade, weak economic data (especially manufacturing), falling corporate earnings, turmoil in the credit and commodities markets, dangerously narrow market breadth (reliance on a few big-tech stocks) and lofty equity market valuations.

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Technically, the Dow is looking weak as well, with its 20-day moving average (red line in the upper pane of the chart above) preparing to fall below its 50-day moving average (blue dashed line) for the first time since June. That's a sell signal indicating the start of a medium-term downtrend. Its stochastic indicator, a measure of momentum shown in the lower pane, has also flashed a sell signal in December.

Hirsch sounds a poetic warning: "If Santa Claus should fail to call, bears may come to Broad and Wall." Here's the takeaway: In years that the Santa rally didn't materialize, stocks finished flat or in the grip of a bear market. The last four such occurrences were in 2008, 2005, 2000 and 1994.

If stocks finish in the red for 2015, it will be the Dow's first pre-election year loss since Germany invaded Poland in 1939. That's looking more likely: According to Yardeni Research, large-cap stocks have posted a year-end rally of needed intensity only 15 times since 1928, or just 17 percent of the time.

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