What the heck is the Santa Claus rally? Well according to Wikipedia, “It’s a rise in stock prices in the month of December, generally seen over the final week of trading to the New Year.” Why you ask? That’s a good question. There isn’t really a plausible explanation. Some say it’s because of tax reasons. That’s rubbish because our tax year ends in June. Another reason is because people are happy around Christmas time. Does that mean happy people are more likely to buy shares than unhappy people? That’s rubbish too. And the other reason is that people tend to re-invest their Christmas bonus into the market causing it to rise. Right. If you think about it, they’re all pretty lame explanations. Either way it doesn’t really matter. We actually think it’s just another self-fulfilling prophecy similar to “Sell in May and Go Away” or “Buy in July” or the most well-known of self-fulfilling prophecies has to be, “Harry Potter and Lord Voldemort.” For those that don’t know, Lord Voldemort was destined to be killed by Harry Potter, making it a self-fulling prophecy. For what-ever reason, the message is clear, the market goes up in December. So get on board. Let’s look at some stats on the ASX 200 Index (XJO): Over the last 11 years the ASX 200 Index has gone 8 times. That’s a 72% certainty that this month will be a winner. I like those odds. The prophecy holds true. Last year the market was up 225 points (4.1%) and the year before that 129 points (+2.5%). With a 72% chance, the odds are stacked heavily in our favour. If we drill down into these stats a little deeper, you’ll notice that the market does rally in the last week of December, but it’s not as considerable as it’s made out to be. It seems that higher gains are made by having exposure from throughout the entire month. Some of you that are still a bit cynical, need to understand that the stock market doesn’t always behave according to the textbook. It’s an emotional creature. Rallies and panic selling sometimes can’t be explained by genuine reasons because its drivers are attributable to human nature and the collective psychology of stock market investors. People do weird and wonderful things that sometimes cannot be explained by rational thinking. Remember this famous cartoon? There’s a lot of truth to it. Stock markets are at times irrational and unexplainable. So with that in mind, we’ve decided to come up with the perfect Santa portfolio that we think you should hold to capture this upside rally based on themes that we think will play out over the month. Here is a list of themes that will impact our market this month: US Federal Reserve interest rate rise – The Fed is on track to raise rates by 25bps mid-December. This will have an instant knock on effect here. US dollar will rise, Australia dollar will fall and Bond yields will rise. That means “rotate our of bond proxy” and “don’t fight the Fed” time. Investors can do well to have their investments aligned with current monetary policy rather than against it. So – sell bond proxies and sell gold. Buy banks and stocks that benefit from strong US dollar. Example Buys are – NAB, CBA, WBC, ANZ, CSL, BLD, JHX, RMD, AMC, COH and, BXB. Sell Gold stocks – Will fall as rates rise. Investors tend to move out of safe haven assets when bond yields become more attractive. RBA Meeting Tuesday 5 Dec – Rates on Hold. No changes. Watch for a change in statement. Whilst there won’t be a rate change here, the interest differential between the US and Australia will narrow. We could see banks raising rates independently to cover a rise in wholesale funding costs. All four banks are due to hold their AGMs in December. Iron ore rally – Has continued its month long rally hitting US$67.94 a tonne. Chinese steel futures are hitting 10 week highs. It rose 8% last Thursday evening taking November’s gains to 16%. It’s good news for iron ore stocks such as Fortescue Metals, BHP and RIO. I Oil – OPEC are due to meet on the 30 Nov. We’ll find out the results on 1 Dec. The market is assuming OPEC will rollover current production cuts for another 9 months, making it a formality till the end of 2018. But Citi says prepare for disappointment. At the moment the market is very bullish on oil continuing its bumper rally and a deal to continue through to 2018. Citi says if OPEC doesn’t extend through 2018, it is hard to see any other outcome than a sharp drop in oil prices.…

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