It's a Jolly Time of Year — But It’s About Individual Stocks, Not the Indexes
Here's what the Santa Claus rally is really about.
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Yale Hirsch, the founder of Stock Trader’s Almanac, is credited with coining the phrase “Santa Claus rally.” He defines it as the last five trading days of December, which starts on Christmas Eve this year, and then the first two trading days of January.
Like all seasonal statistics, outperformance during this period is a tendency and not a certainty, and in this case, the outperformance isn’t even that notable. Since 1969, the seven-day period has produced an average gain of 1.3% for the S&P 500, which may not be statistically significant.
However, the reason that the Santa Claus rally period enjoys so much attention is that it is much more about individual stocks rather than the indexes. For example, on Monday, the Russell 2000 IWM bounced back from a poor start but still had a loss of 0.2% at the close. Under the surface, there were 65 stocks in the Russell 2000 that gained more than 5%, but in the S&P 500, there was only one.
What that tells us is that speculative traders are looking for more volatile stocks to trade during this period. Many of these stocks are bounce plays near lows that start to see some relief as tax-selling pressure is lifted.
Another phenomenon that is occurring is that large-cap technology stocks are staying strong as fund managers want to show them in their year-end holdings and don’t want to sell and trigger tax consequences. This inclination is so strong that the top-10 stocks in the S&P 500 now weigh nearly 40%, which is a record. Ten stocks in the S&P 500 matter as much as the other 490. That is an amazing amount of lopsidedness and covers up the fact that the Russell 2000 is almost exactly flat over the last three years at a close on December 23 of 2,241.
We will see what develops Tuesday, but volume will be light, and there are likely to be pockets of speculative trading. In the early going, the Magnificent Seven MAGS are leading once again.
At the time of publication, Rev Shark had no positions in any securities mentioned.
