Savvy equity investors have fattened their returns this year, buying on pullbacks during the U.S. market's rally, and that activity may be enough to buoy prices through the end of the year.

The much-vaunted tactic of buying the dips, which failed miserably in 2007 and 2008, has been a winning strategy since stocks rallied 60 percent from March.

Investors who missed out on part of the rally used pullbacks as a chance to get into the market. There may be enough interest from fund managers, struggling to beat their benchmark index, to keep stocks afloat through the historically strong month of December.

The reality is that all of the cash on the sidelines that is earning zero in interest makes those pullbacks shallow and short-lived, said Henry Smith, chief investment officer at Haverford Trust Co in Philadelphia.

Smith said the tail winds boosting equities - low interest rates, government stimulus spending, improving corporate earnings and a synchronized global recovery - were outweighing headwinds and would continue to do so in the near future.

Equity markets have been in a sweet spot for much of this year. Low interest rates have not only provided a source of cheap funds but are encouraging bolder investors out of money market funds and into riskier, higher-yielding assets like stocks.

Since the beginning of the year about $554 billion has left money-market funds, according to the Investment Company Institute. The $3.3 trillion still left there earning close to nothing is still around $179 billion more than at the start of 2008.

The majority of fund managers are still lagging the index, so I don't think there are a lot of fund managers going and sitting on the beach as we move into the end of the year, said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

Retail investors have not been convinced. This year, the ICI data shows a net outflow of about $6.5 billion from domestic stock mutual finds. By contrast, a net $268 billion has entered bond funds so far this year.

THE YEAR-END RALLY

History supports those looking for a strong finish to the year. November and December on average have been the first and second best performing months for the S&P 500 since 1952, according to the Stocks Traders Almanac.

The best performing three month period has traditionally been November, December and January. In the last days of the year a so-called Santa Claus rally has added 1.4 percent to stock prices within the last five days of December and the first two days of January.

But there have been few occasions when stocks have rallied so far so fast, and some investors are still expecting the market to correct as the March rally runs out of steam. Falling trading volumes toward the end of the year could add to volatility and amplify moves in either direction.

If you've got a longer-term time horizon you really want to be in the harvest mode here, said Bill Strazullo, partner and chief investment strategist at Bell Curve Trading in Boston. Take your profits and step back, begin to unwind long positions.

There have been signs of late that the equity market has been getting more defensive. Classic defensive areas like healthcare, utilities and consumer staples, which investors turn to in times of uncertainty, were among the stronger sectors at the end of last week.

During the last bout of weakness in U.S. equities from mid to late October, the S&P telecom services index .GSPL was the best performing, losing only 1.4 percent.

The market has had a huge run. People are probably going into a defensive mode, and the market's likely not going to do a whole lot the next six weeks, said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville.

If those areas are strong heading into the end of the year that could support the market even if more aggressive sectors like materials and energy pare gains.

The stock market has shown great resilience since March despite those looking for a retreat. Pullbacks have been around 6 percent, once in July, and once in October. A correction is seen as a fall of 10 percent or more.

Wall Street analyst firm Birinyi Associates has noted stocks rallied without a correction for seven years from 1991, tripling in value during that time. Again between 2003 and 2007 stocks failed to correct. That was upended in late 2007, when stocks corrected and experienced more volatility.

Many investors usually start repositioning for the end of the year after the Thanksgiving holiday on Thursday. In the weeks following, it should become clearer whether stocks are heading for a champagne finish or cold turkey sandwiches.

(Reporting by Edward Krudy; Editing by Kenneth Barry)

New York Investment