'Santa Claus Rally' Likely Next Week

Stocks may cruise a bit higher next week as investors celebrate the holidays with renewed faith in the U.S. economy and corporate profits.

Santa Claus tends to visit Wall Street almost every year, bringing a short but respectable rally in the last five trading days of the year and the first two in January, according to the Stock Trader's Almanac (search). The so-called "Santa Claus rally" has been good for an average 1.7 percent gain since 1969, or 1.5 percent since 1950.

The Dow Jones industrials (search) have risen the day before Christmas in eight of the last 12 years and advanced the day after Christmas in 10 of the past 12 years, according to the Stock Trader's Almanac.

"We should have modest strength into the end of the year," said Paul Cherney, a market analyst at Standard & Poor's Marketscope. "The balancing act is justifying additional purchases when we know that valuations are high."

This year marked the end of the brutal three-year bear market that wiped out trillions of dollars of investors' wealth. Signs of an economic recovery drove the tech-heavy Nasdaq composite up a stunning 46 percent, while pushing both the blue-chip Dow Jones industrials and the broad Standard & Poor's 500 (search) up more than 23 percent so far this year.

"It's clear the economy is really rebounding, but the issue is how much of the recovering economy is already reflected in stock prices," said John Davidson, president and chief executive officer at PartnerRe Asset Management.

Trading volume will likely be paltry next week as the nation's workforce tacks on a few extra days to their holiday time. The U.S. stock market will shut early at 1:00 p.m. EST on Wednesday for Christmas Eve, close on Christmas Day on Thursday, and shut early again at 1 p.m. on Friday.

"Traditionally, it's a quieter week," said Evan Olsen, head of equity trading at Stephens Inc.

Analysts will be looking for any news from U.S. retailers, for whom the last week and the weekend before Christmas can make or break them for December.

The nation's economy may take a back seat to the holidays, but the reports will still grab attention as investors look for more proof of an improving economy to justify further gains.

On Tuesday, Wall Street will get the final reading on gross domestic product, or GDP, for the third quarter. Analysts polled by Reuters expect the final number to be the same as the previous reading -- an 8.2 percent annual growth rate. That marked the strongest quarterly advance in 19-1/2 years.

Personal income and spending data, a report on durable goods, a final reading on December consumer sentiment from the University of Michigan (search), and a report on new home sales will round out the holiday-shortened short week.