The Athens bourse posted heavy losses for the second consecutive year in 2001, being unable to recover from the burst of the 1999 stock market bubble. Therefore, it comes as no surprise that there has been no Santa Claus rally again this year, although a number of market participants have not lost hope and are betting that the so-called January effect will bring about a rally early next year. Indeed, figures show Athens was one of the worst performing markets among developed European bourses both in December and the whole year. The stock index MSCI-Greece registered losses of 3.18 percent in December and 27.62 percent from the start of the year, making it the third worst performer in developed Europe after the stock indexes MSCI-Luxembourg and MSCI-Finland, which posted year-to-December 28 losses of 43.10 percent and 35.76 percent respectively. The Athens bourse did not fare well even when compared to the markets of other small EU countries such as Portugal and Ireland. The Portuguese MSCI stock index was down 18.82 percent from the start of 2001 while the Irish market’s MSCI index was in positive territory for the year, posting a slight year-to-date 0.36 percent rise on the back of a 4,94 percent rally in December. The picture did not change even when the Athens bourse’s performance was compared to broader MSCI indexes. The well-known stock index MSCI-EAFE, used by the majority of foreign institutional funds as a benchmark, was up 1.76 percent from the beginning of the month through December 28, but down 17.46 percent year-to-December 28. The stock index MSCI-Europe was up 2.27 percent this month but down 17.68 percent for the year. The Athens bourse’s poor performance in December and the subsequent lack of the traditional Santa Claus rally for the second year in a row can be explained to a large extent by what preceded it. With the Athens Stock Exchange (ASE) general stock index falling below the 2,000-point psychological mark on September 20 and the major foreign bourses bouncing off their lows to rally subsequently, a rebound was almost inevitable. The question was whether it would take the form of a short-term, technical rebound or would prove more sustainable. It turned out the latter was the case, mainly thanks to a few events which helped fuel domestic speculation for more M&A deals, such as the proposed merger between Alpha and National Bank, a push for more privatizations with the appointment of Nikos Christodoulakis to the post of finance minister and finally the rebalancing of the MSCI indexes tracked by most passive foreign institutional portfolios on November 30. Once all these factors had been priced in, a normal market correction ensued. However, unlike other foreign developed markets, the Athens bourse was unable to stage a rebound. This was because there was neither encouraging fresh economic news nor foreign net buying into the known basket of five to ten selected Greek stocks to propel the whole bourse higher and fuel a Santa Claus rally. Moreover, the appetite of domestic institutional investors for the typical year-end window dressing was limited since 2001 had turned out to be another year of heavy losses. As a result, some preferred to start 2002 from a low base rather than an artificially higher one. What does all this mean for January? First of all, it is in the best interest of all local institutional investors to start 2002, the Year of the Horse according to the Chinese mythology, with positive returns so as to reinvigorate the flagging interest of local retail investors, who seem to pay little attention to fundamentals but more to share price momentum, in buying their stock fund shares or closed-end fund shares. The extra liquidity will be used to buy stocks and maintain the market’s momentum. However, local institutionals cannot ignore either corporate or macroeconomic fundamentals even if they find themselves awash in cash. Moreover, Greek institutional portfolios have a long history of following the moves of foreign portfolios rather than leading them. That means their stance will be determined to some extent by the moves of their foreign counterparts. If the latter decide to invest more money in Greek stocks, then it is likely local institutionals will become bolder and follow up. If not, they will adopt a wait-and-see attitude and take a more conservative stance, which in general does not bode well for the Athens bourse. Traditionally, the bulk of foreign portfolio investments on the Athens bourse have taken place in the first three weeks of January. If foreign markets do rally in January, on the back of clear signs of a sooner-than-expected rebound of the US and eurozone economies, and the famous January effect – above average stock returns mainly due to tax reasons and institutional positioning – comes into play as well, there is good reason to believe that some foreign cash will be directed into a few Greek stocks. This will encourage domestic institutionals to plow more money into equities, thus pulling the entire market higher in the process as the so-called «lobbies» of private investors prop up the stock prices of small-caps distinguished for their small free-float. If the chances of a bad month being followed by a good month are high, then there is reason to believe January will turn out to be a better month for the Athens bourse than December. Chances aside, the actual outcome will be mainly shaped by the stance of both domestic and foreign institutional portfolios. Since Greek retail investors have no tax reasons to inspire them to buy into stocks, and domestic institutional investors want to start the New Year on a firm footing but usually hesitate before others take the initiative, it is the foreign institutional portfolios which hold the key to the Athens bourse’s performance in January.