What Are the Actual Odds of a 'Santa Claus Rally'?
Seasonal patterns and market mindset will come into play, but the term's creator had a pretty specific take on the chances of a Christmastime boost.
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There has been a lot of talk about expectations for a "Santa Claus rally" this year, but let’s make sure all Pro Portfolio readers are familiar with the term. A Santa Claus rally refers to the sustained increases found in the stock market during the last five trading days of December through the first two trading days of January. When we look at the calendar for this year, that period begins with today’s shortened trading session and ends on Jan. 3.
The Santa Claus rally indicator was first recorded in 1972 by Wall Street legend Yale Hirsch, the creator of Stock Trader's Almanac. Historical data shows positive returns four-fifths of the time, with the S&P 500 averaging a 1.3% gain during this period since 1950, with even stronger average gains of 1.6% when the data is examined back to 1928.
Those are pretty good odds, but what about that other one-fifth of the time?
The answer brings up a somewhat familiar Hirsch-ism: "If Santa Claus should fail to call, bears may come to Broad and Wall."
Noting the “may” in Hirsch’s words, the folks behind the Stock Trader’s Almanac point to two other seasonal indicators to help determine what could be ahead. The first is the "First Five Days" early warning system, which refers to how stocks perform in the first five sessions of the year, and the second is the "January Barometer," which is the S&P 500’s performance in the first month of the year.
Referred to as the “January Trifecta” as the Trader’s Almanac points out, since 1950 when all three indicators are positive, the market has ended the year higher about 90% of the time, with an average gain of almost 18%. Years when the Santa Claus Rally fails to materialize, markets are either flat, bear markets or at least a time when you can buy stocks cheaper during the year.
While we’re folks who follow the data, we have to be cognizant of investor sentiment as well as market mindset and superstition when it comes to seasonal patterns in the market. The why behind that is that these patterns persist.
As we wait to see if the Santa Claus rally emerges, something we may not know until we close out next week, we’ll continue to get ready for the coming year.
We’ll close out today’s alert by saying we’ll see you later this week, and we wish you a very merry Christmas, happy Hanukkah, and cheer-filled holidays.
At the time of publication, TheStreet Pro Portfolio had no position in any security mentioned.
