What Is the Santa Claus Rally? The Motley Fool

Like other calendar effects, including the January effect and phrases such as, “Sell in May and go away,” there is strong evidence that the Santa Claus rally is real and can predict the market’s outcome. Observing the Santa Claus rally is common, but trying to trade the phenomenon is another matter. Investors should be mindful of rules in trading during this period.

• The Santa Claus rally happens after Christmas, so we can’t clearly attribute it to holiday spending.
• For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results of trading two kinds of six-day groupings.
• Between 1926 and 1950, it existed as the Composite Stock Index, tracking 90 stocks.
• There was a mild rally that again only picked up in the new year of 2022.
• But is this Christmas rally a reality or just another investment myth?

Another theory is that many corporations hand out annual bonuses at year-end, and all the extra money workers receive gets spent or invested, pushing stock prices up. The Santa Claus rally happens after Christmas, so we can’t clearly attribute it to holiday spending. Still, the period between Christmas and New Year’s, when many people are off work, tends to be busy with shopping activity from returning unwanted gifts, buying unreceived wish-list items and https://forex-review.net/ mining year-end sales. Just because the Santa Claus rally does usually happen, and it often predicts the market the following year, that doesn’t mean it will continue to do so. If investors anticipate it, they are likely to behave differently, and market participants may adjust according to the expectation of a Santa Claus rally. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

Example of A Santa Claus Rally

Such supply constraints, coupled with steady or increasing demand, have the potential to drive up Bitcoin’s price, making the dynamics surrounding the Santa Claus Rally even more intriguing. Given past trends and current market dynamics, a cautiously optimistic outlook seems warranted for Bitcoin in the 2023 Santa Claus Rally. However, it’s vital to recognize the inherent volatility and unpredictability that characterizes the cryptocurrency market. “I believe January will test the market, as earnings dominate and the Fed meets (to determine interest rates) Jan 31-Feb 1,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

You can connect with Amy on Twitter (@AmyFontinelle) or learn more at her website, AmyFontinelle.com. From 1987 through 2016, no evidence of a Santa Claus rally exists in the S&P 500, according to a statistical analysis by Brigid Cami, then a master’s https://forexbroker-listing.com/ student at the University of Toronto. At least two other academic studies, albeit less rigorous ones, have found that no Santa Claus rally exists. Differences in analytical methods likely exist among various Santa Claus rally studies as well.

The best Santa Claus rally definition is that stock markets post positive results in the immediate run-up to Christmas and the very start of the new year. Over the years, many analysts have tried to speculate about the reasons https://forex-reviews.org/ 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.

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Does that mean those same days will have higher probabilities of heads and tails, respectively, if you perform the experiment again? Each coin toss in an independent event with odds of either outcome. To be sure, past performance is no guarantee of future performance, and the statistical trends for the market’s performance post—Santa Claus rally are fairly thin. December tends to be among the strongest months of the year for U.S. stock performance.

What It Means for Individual Investors

Some observers posit that the Christmas holiday means fewer large institutional investors are actively trading. But there’s no consensus on how their absence or reduced activity might contribute to a Santa Claus rally. Though not identified until 1972, the trend dates back to at least 1900.

A Santa Claus rally is a jump in stock prices, observed in the final five trading days of the year, typically starting a day after Christmas and going into the first few trading days of the New Year. Historically, this seven-day period has brought good news for investors, giving them another reason to cheer during the holiday season. Some believe that the rally is caused by the temporary bullish optimism of investors relaxing with family or from retail investors investing their holiday bonuses. There are also more general calendar trends called the ‘holiday effect’ or the ‘long-weekend effect’ where the stock market is theorized to perform better than average before holiday periods. This could be because lighter trading volumes during these periods make it easier for bullish investors to move the market. There are also theories that the Santa Clause rallies occur because institutional investors go on vacation over the holidays and aren’t actively trading during that time.

TRENDING

One is that stocks rally in the week between Christmas and New Year’s, and that carries into the second day of trading in the New Year, usually Jan 2. The other time-span definition—and our preferred one—is the week leading up to Dec. 24. But both time periods show negligible returns at best on average, making the Santa Claus rally something of a myth, just like the jolly old elf himself. There are two schools of thought about the timing of the Santa Claus rally effect on the Standard & Poor’s (S&P) 500 Index. The first suggests the Santa Claus rally occurs in the week leading up to and ending with Dec. 24, Christmas Eve.

What is the Santa Claus Rally?

And if that happens, I would certainly consider investing back into bank stocks. Canadian banks are due to rise once more from Canadians seeking out loans, and they tend to bounce back quickly after downturns from provisions for loan losses. Many individuals will see the most benefit from long-term investing in diversified mutual funds. According to data compiled by Stock Trader’s Almanac in the 70 years between 1950 and 2020, a Santa Claus rally has occurred 57 times and has, on average, seen the S&P 500 go up by 1.3%. Between 1926 and 1950, it existed as the Composite Stock Index, tracking 90 stocks.

Will there be a Santa Claus rally this year?

The second is specifically the returns from trading the Santa Claus rally belief. The week before Christmas typically has normal to significant volume, compared with the week after Christmas, which is usually marked by generally sideways stock-price movement with small ranges. The week before Christmas also captures much of the end-of-the-year adjustments from institutional players seeking to close their books before the Christmas holiday. The week after Christmas usually comes with much lower volume, suggesting that institutional players have withdrawn from the market for the rest of the year. 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.