If history is a guide, stock investors may be poised to get a gift over the holidays. Historically, the Santa Claus Rally has occurred 76% of the time between 1950 to 2019. According to the 2019 Stock Trader’s Almanac, the market has risen an average of 1.3% each year during that period. Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can’t expect him to always deliver reliable stock-market gains. The ultimate hope is that the markets remain choppy in the next few days but rallies going into the close of the year.
- The data that we examined shows a roughly 60-65% chance of a positive week in the run up to Dec. 25.
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- Some investors use the existence of Santa Claus rallies as indicators for the coming year.
- It is an interesting news headline happening on the periphery but not a reason to become either more bullish or bearish.
- That temporarily pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher.
These two rallies were derived from similar circumstances, as the 2008 rally came at the end of the worst year for the S&P 500 since the Great Depression, and the 2018 rally came at the end of the worst year for the S&P since 2008. „That is meaningful,” Batnick said of the difference in returns and positivity rate. More active investors, however, may want to make their portfolios more aggressive to try to make the most of the rally and use the appearance (or lack thereof) of the rally as an indicator for how to invest in the year ahead. This combination — a strong consumer and economy, coupled with a Fed that is raising rates slowly and gradually — means the market should hold up in 2022. Meanwhile, technology — which is the largest sector in the S&P 500, is flat because some of the largest stocks (particularly Apple) have done well.
Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Coined by Yale Hirsch, founder of the Stock Trader’s Almanac, the Santa Claus Rally describes what happens over the last five trading days of the year and the first two of the next. And if history is any indication, the absence of a Santa Claus Rally has also typically served as a harbinger of lower near-term returns.
Santa Claus Rally: What Is It, When Can It Occur?
From the opposite perspective, a Santa Claus rally isn’t a reliable forecaster of future returns. For example, even though the S&P 500 yielded 1.4% during the seven-day period in 2021, it topped out on the 3rd of January. The window of time for the so-called Santa Claus rally is technically the final five trading days of a calendar year and the first two in January. Since late 1928, the S&P 500 has been positive in that stretch 78.5% of the time, according to Bank of America. Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season. The unlikeliness of the government or regulators announcing any bad news during the holidays may be the driving force behind this optimism.
For example, according to data compiled by LPL Research and FactSet, the Santa Claus rally period in 1999 saw the S&P 500 drop 4% and the Dotcom bubble burst in 2000. Similarly, corresponding trading days in 2007 saw the S&P 500 drop 2.5%, and 2008 saw the Great Recession. The second major question is whether the Santa Claus rally really even exists.
Using the week leading up to Dec. 24 over two decades, we find there is no tangible or reliable Santa Claus rally. Whether you count that time period or the week after Dec. 25 up to Jan. 2 of the new year, the returns are negligible, if slightly positive at +0.385%. Traders pay attention to cyclical trends and, at times, find ways to exploit historical patterns. But it’s always a relatively random proposition, and the Santa Claus rally is no exception. For those who do trade ostensibly regular patterns, they tend to do so repeatedly over time, by limiting both the amount of risk and reward they take on via position-sizing, stop orders, and cutting losses short if positions go against them.
Some investors use the existence of Santa Claus rallies as indicators for the coming year. If there’s a Santa Claus rally to end a year, the next year is expected to be good. Regardless of the mechanics behind the rally, it’s an observable effect and it occurs roughly two out of three years, backtesting software forex so investors should be prepared to see whether Santa shows up at the end of each year. „That is a very small move, less than 1%,” Alec Young, chief investment officer at Tactical Alpha, told me. „That is a day’s trading. Even if we chop around for a few days, we can still do it.”
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Santa rally history
It is an interesting news headline happening on the periphery but not a reason to become either more bullish or bearish. A better strategy is to maintain a long-term investment outlook and not be tempted by the promise of Santa Claus rallies or the January Effect. Most long-term oriented investors don’t really need to spend much time obsessing over what may happen in the stock market over extremely short periods of time.
Historically, this seven-day period has brought good news for investors, giving them another reason to cheer during the holiday season. A ‘Santa Claus Rally’ is a term used to describe the phenomenon where the stock market jumps in value during the last week of December and into the first two trading days of the new year. There are a number of theories as to why this happens – from tax considerations to investors Forex deposit bonus buying stocks with their holiday bonuses. Others insist that the Santa Claus Rally is related to increased holiday spending. In fact, some analysts suggest that strong retail spending is seen as an important economic indicator of economic growth and promotes bullish buying behavior as a result. High year-end sales figures have a tendency to drive retailer stock prices up in anticipation of good quarterly returns.
Will there be a Santa Claus rally this year?
A similar occurrence happened in 2018 when another Santa Claus rally preceded a 29% broad index return in early 2019. Chase’s website and/or mobile terms, privacy and security policies don’t apply to the site or app you’re about to visit. Please review its terms, privacy and security policies to see how they apply to you. Chase isn’t responsible for (and doesn’t provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the Chase name.
Some analysts believe that it’s caused by the completion of tax-loss harvesting. Professional investors often adjust their portfolios at the end of the year for tax purposes by selling stocks at a loss. That temporarily pushes down stock prices, but that trend is soon reversed as investors begin buying stocks again, pushing prices higher. Over the years, many analysts have tried to speculate about the reasons for the Santa Claus rally. The perceived causes for the rally include an overall, holiday-season spirit, in which retail traders hold an outsize bullish outlook and institutional players tend to step back from the market.