Santa Claus Rally In Stocks: What It Means For Investors

For example, bonuses may be calculated after best stocks for trading options the company’s fiscal year ends and its annual performance can be calculated. And even if a company awards bonuses in December, they might not show up in workers’ paychecks until mid-January.

A Santa Claus rally is the sustained increase in the stock market that occurs around the Christmas holiday on Dec. 25. Most estimate these rallies happen in the week leading up to the Christmas holiday, while others see trends that begin Christmas Day through Jan. 2. Over the past few years, this seasonal trend has spread beyond stock exchanges, and the cryptocurrency market will sometimes punch above its weight come year-end rallies. The Santa Claus rally has become an important symbol of hope and market optimism for crypto traders, who use this rally as ammo to gauge possible wins and reboot their tactics for any latent year-end bullish momentum. The same stock market trend, the Santa Claus rally, refers to heightened optimism around the holidays (often in late December). However, can the festive boost for digital currency also apply to the marketplace as well?

Santa Claus rallies may or may not last through the remainder of January and on through the year. For example, despite a strong Santa Claus rally at the end of 2008 and early 2009, the S&P 500 lost nearly 11% between the end of the rally and the end of January. There are many explanations for why Santa Claus rallies occur, but it is hard to pinpoint the exact reasons. Some view it as a seasonal pattern worth considering, while others may see it as a coincidence without significant predictive power.

What is the Santa Claus rally in the stock market?

Understanding and analyzing this impact is crucial for investors seeking to make informed decisions during this period. Just because the Santa Claus rally does usually happen, and it often predicts the market the following year, that doesn’t mean it trend trading capitalizes on market momentums 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. 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.

Last December, I outlined four concrete reasons I believed there would be a bear market in 2023. I still believe my reasoning was solid, but the S&P 500 is up 24% year to date as of this writing, far outpacing its annual average. “When you think of a Santa Claus rally, it’s all about anticipating or looking forward,” said Terry DuFrene, global investment specialist at J.P. 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. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.

Santa Claus Rally: What It Is and Means for Investors

For the average return of the week leading up to Christmas, the so-called Santa Claus rally, we calculated a +0.385% total return, with 13 winning weeks, five losing weeks, and two unchanged weeks. More important, the average winning week gave a +1.85% return, while the losing weeks averaged a -3.28% return, skewing the risk/reward ratio against the trade (being long S&P 500). In early December, investors looking to reduce their taxable gains and rebalance their portfolios often sell stocks that have lost value, a practice called tax-loss harvesting. This large-scale selling, it’s theorized, depresses many stocks’ prices and sets the stage for year-end gains. When investors consider data that spans 20 years of performance of the Standard & Poor’s 500 (S&P 500) in the week leading up to Dec. 25 from 2002 to 2022, there is minimal evidence of any discernible Santa Claus rally. Based on the S&P 500, there were 13 weeks with a positive return, five with a negative return, and two with no change.

1. A bullish sentiment occurs when new traders enter the market, fearing they’ll miss out on year-end gains (fear of missing out, or FOMO).
2. The Santa Claus rally is just one of many seasonal indicators Yale Hirsch and other technical analysts claim to have discovered.
3. The tech bubble ended up bursting in early 2000, and 2008 produced one of the worst years for the stock market in decades as the economy plunged into recession amid the subprime mortgage crisis.
4. We will also explore the critiques and controversies surrounding this phenomenon, and provide insights on how to strategize investing during a Santa Claus Rally.

Skeptics argue that attributing stock market movements to a specific time of the year, such as the holiday season, is merely Top natural gas stocks coincidental and does not represent a predictable pattern. The Santa Rally phenomenon in the stock market is not without its skeptics and controversies. While many investors eagerly anticipate the rally, others question its validity and argue that it is merely market folklore lacking a solid foundation in economic theory. This section will explore the critiques and controversies surrounding the Santa Rally phenomenon, shedding light on the different perspectives and theories.

In this examination of the Santa Claus rally, we’ll discuss the origins of the rally, why it happens, and the history behind it. The Santa Claus rally is just one of many seasonal indicators Yale Hirsch and other technical analysts claim to have discovered. 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 student at the University of Toronto.

Q. Can market sentiment indicators provide insights into the likelihood of a Santa Claus Rally?

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. An example of a big Santa Claus rally occurred in December 2008 going into January 2009. A seven-trading day period starting Dec. 24, 2008, and ending Jan. 5, 2009, saw the S&P 500 gain 7.36%. This rally brought some respite to the index that had, until then in the year, dropped more than 40%.

Increasing confidence might stabilize the market and drive a seasonal rally as institutions adjust their portfolios for the beginning of the new year. This sentiment is often exaggerated for cryptocurrencies on social media, where trends, news, and highly vocal voices create buying activity. Ultimately, like most things related to Bitcoin’s December performance, he can’t say for sure what’s ahead for the digital currency this month. Some crypto traders believe there could be a Christmas crypto rally, but this inconsistency calls the idea of a stable year-end trend into question. However, if the party that wins future elections pushes policies that should be a tailwind to cryptocurrency, traders may be more willing to bet on long-term growth and make crypto prices rally to Santa Claus price action. Because the cryptocurrency market is still relatively young compared to traditional markets, the Santa Claus rally may not have formed its pattern yet.