Every year on December 1st, we start hearing a lot about a Santa Claus Rally but when exactly is it going to take place?
Historically, stock market prices tend to rise in the month of December, most of the time it’s a positive month. No other month has reported an average return higher than December since 1950. The Dow has added an average of 1.55% in December over the last 100 years, rising 74% percent of the time.
In general, the Santa Rally is typically seen only during the last business week of the last 5 days of December and the first two days of January in the New Year. It is a form of seasonal calendar effect on the market. Yale Hirsch first documented the idea of the Santa Rally in his Stock Traders Almanac in 1972.
Why Does This Happen?
The nature of this bullish trend does not have a generally accepted explanation. Sometimes the surge is due to accelerated investor interest based on an expectation of a bullish January. One alternative is to pump additional funds into the stock market for tax reasons that have to be done before the end of each year, such as investing money into a tax-differed IRA or 401K. Additional reasons for the Santa Rally may be attributed to “window dressing” of institutional investors ‘ portfolios by adding money for accounting purposes to winning securities and sectors.
Additional reasons for the Santa Rally may be attributed to “window dressing” of institutional investors ‘ portfolios by adding money for accounting purposes to winning securities and sectors. Also, when bigger institutional investors and professional traders spend the remainder of the year on holiday after Christmas and the New Year, smaller retailers can turn the market upside down because so few can sell in volume to bring down the market.
According to a recent Stock Traders Almanac, since 1969, 34 of the last 45 holiday seasons, have shown positive gains from the Santa Claus rally, the last five trading days of the year and two trading days in the first two days after the new year. The estimated aggregate return over these 7 trading days is 1.4%, and the returns are positive on average all 7 days of the rally.
A failure of the Santa Claus rally to take place is quite bearish and usually suggests a bad economic outlook for the coming year; an absence of the rally has often signaled a warning of the New Year’s flat or bearish market trend.
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