The Santa Claus Rally
Are the markets cyclical? Is society always doomed to repeat itself? It would seem that simple human nature and our fascination with using regressive analysis to predict future performance would almost mandate such behavior in the markets. We’ve all heard the old saying, “Sell in May and Go Away.” A few months ago, I posted on the less well known follow-up to the saying “The Halloween Indicator,” which describes that the period between November 1 and April 30 has historically encapsulated the bulk of returns in the Dow Jones as well as thee S&P 500. A curious pattern indeed. Well, this market curiosity continues with “The Santa Claus Rally.”
What is the Santa Claus Rally? It is a phenomenon discovered by Yale Hirsch and published in The Stock Traders’ Almanac and it describes a year-end rally in stocks from the day after Christmas until the first two days of the New Year. Well, going back 100 years in the Dow Jones Industrial Average, this phenomenon does exist. In fact, it happened over 65% of the time even during the bear market in 2000, 2001, and 2002.
Source: InvestmentU.com
Will it happen this year? Well, if the 200 point run up in the Dow this Friday (December 21) is any indicator, this market curiosity may be making yet another appearance. Just in time to pad our year end results. Actually, if Eddy Elfenbein of Crossing Wall Street is correct, the Santa Claus Rally can actually be extended from December 26 – January 2 to December 21 to January 7. In fact, his numbers crunched on the last 111 years of the Down Jones Industrial Average confirm both the Santa Claus Rally and the Halloween Indicator. The Dow, on average, rises 7.79% from October 29 until May 6 with the most impressive short term gain of 3.39% between December 21 and January 7. Most importantly, the period between the end of October and the beginning of May typically encapsulates over 93% of the Dow’s annual returns.
So, why might the Santa Claus Rally exist? Other than that it might be a self-perpetuating market curiosity, there are some structural reasons for its exists. First and foremost, year-end tax loss selling will begin to alleviate itself around this period. Also, most people ranging from retail investors all the way to institutional investors like mutual funds tend to fund their strategies at the beginning of the year. Heck, a lot of people just like to invest on a calendar year to calendar year strategy. I know I purposely started my investing on and around January 1 when I first decided to open a stock account.
This year, we have the added bonus of rate cuts and huge additions of liquidity by the Federal Reserve for the last four months ostensibly priming the pump. Could Santa just be waiting to deliver a nice little surprise at the end of the year?
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
