2013 hasn't started yet, but we'll go into the new year armed with the knowledge that the world didn't come to an end on December 21.  So, with a little bit of calendar leeway, we'll say the new year is off to a good start simply because it will start.  What happens after that is anyone's guess.

Predicting the future is simply tough business.  Still, using history as a guide, that doesn't stop all of us from trying.

On that note, we present two things to think about this week in our last installment of The Big Picture this year (we say that with the editorial caveat that fiscal cliff developments will likely necessitate a post on December 31).

In the meantime, we would like to thank you for your readership and wish you a happy holiday season and new year.

Thing 1    

Here Comes Santa Claus, Here Comes Santa Claus... or Not

With today's post, Christmas is just a day away and kids everywhere are anxiously awaiting Santa's arrival.  So, too, are stock market participants who are anxiously waiting to see if Santa will pay a visit to Wall Street this year.

Unlike his brief visits to homes around the world, Santa has shown an inclination to hang around Wall Street a little longer most years.  And why not?  The Big Apple is full of energy and has the best New Year's Eve celebration around.

Some years, though, Santa simply isn't in a New York state of mind.  This year, with all of the fiscal cliff bickering in Washington, we can understand why he would opt to shake the dust of the US off his boots and get back to the North Pole as soon as possible.

The market will have some sense of Santa's whereabouts based on how the S&P 500 performs over the last five trading days of the year and the first two trading days of the new year.   According to the Stock Trader's Almanac, that is the period that tends to produce a respectable rally, otherwise known as the "Santa Claus rally," that has been good for an average 1.5% gain since 1950.

When the market registers a net gain in that time, we know Santa decided to hang around.  When it experiences a net loss, we know Santa headed home early -- a decision the Stock Trader's Almanac says "...tends to precede bear markets, or times stocks could be purchased later in the (new) year at much lower prices."   

The converse doesn't hold true.  Santa showing up doesn't guarantee a raging bull market in the coming year.  That was clear in 2011 when the market ended the year flat despite a 1.1% gain in the Santa Claus rally period of 2010.

The stock market has had a nice run of late, gaining as much as 7.0% since November 15.  That move has been aided in part by the belief that a fiscal cliff compromise will be struck in time that prevents the US from slipping back into recession.

Well, the December 31 deadline is drawing very near and there still isn't a deal.  If there is to be one, it looks like it will be an eleventh-hour compromise (though not a solution). 

It is presumed the market will respond favorably to news of a deal and unfavorably to word that a deal could not be struck. 

We don't know what Santa's post-Christmas plans are this year.  The manner in which the fiscal cliff discussions proceed from here will likely be the difference that determines whether he hangs around to see the ball drop in Times Square or simply heads home to watch political leaders drop the ball in Washington.

Thing 2

Barking Dogs

In years past, and even earlier this year, we have highlighted the "Dogs of the Dow" investment strategy.  The Dogs of the Dow are the ten Dow Jones Industrial Average components with the highest dividend yield.

The website dogsofthedow.com offers an insightful look at the historical performance of the Dow Dogs and the process for carrying out this investment strategy.

Procedurally, it is a simple investment process.  After the market closes on the last day of the year, identify the ten highest-yielding Dow stocks, and then buy them at the start of the year investing an equal dollar amount in each of the stocks.  Hold the stocks for a year and repeat the process at the end of the next year.

A variation of the strategy is to buy the five lowest-priced of the ten highest-yielding Dow stocks.  These are called the "Small Dogs of the Dow."  Again, one would purchase them at the end of the year, investing an equal dollar amount, and hold them for a year.

According to dogsofthedow.com, the average annual total returns for the Dogs of the Dow have outpaced the S&P 500 for the one, three, five, 10, and 20-year periods ending December 31, 2011.  The Small Dogs have done the same with the exception of the 5-year period.

Past performance of course is no guarantee of future results.  As we noted in a column published in May, the Dow Dogs strategy tends to work best when stock market gains are limited.  The Dogs approach, however, is more prone to underperformance when the stock market is rallying strongly because growth stocks rise more sharply than these less volatile stocks.

As 2012 draws to a close, we present the leading candidates for a 2013 Dogs of the Dow strategy based on Friday's closing price (the Small Dogs are bolded).

--Patrick J. O'Hare, Briefing.com