Every year around this time, the press and media question whether there will be another Santa Claus rally this year. So, will there be another Santa Claus rally in the weeks ahead?
A Santa Claus is a trading phenomenon that suggests the stock market often rallies into the last weeks of December through the first two trading days in January.
Whether it is because of the holiday spirit, December tends to be one of the more bullish months of the year. It does not necessarily mean that there are no pullbacks during December, but investors should not expect a sharp market rally. Nonetheless, the last few weeks of the year are skewed to the upside more often than not.
What are the reasons for December being bullish?
There are several theories behind the Santa Claus rally, including tax strategies, optimism on Wall Street, holiday and year-end bonuses, and professional money managers going on vacation, leaving the market in the hands of the more bullish-minded retail investors.
Investment professionals such as market pundits and strategists release next year’s market forecasts. These forecasts tend to be upbeat more often than not, swaying clients and especially individual investors to be even more bullish into year-end and the early parts of the New Year.
Many believe the holiday season, namely Christmas, has given rise to the trading phenomenon commonly referred to as the Santa Claus rally. Studies showed that before Christmas became a public holiday in the mid-19th century, Decembers had a record of slightly above average performers. However, since the onset of the public holiday, the market began performing much better during December. Some postulate the holiday season can influence investors to spend and give freely, spurring a year-end rally stock market rally.
Others believe investors are less likely to sell stocks when the stock market is bullish as there are fewer losses to offset capital gains. However, when the market is flat-to-lower into year-end, there are ample opportunities for investors to implement tax-loss selling strategies.
Yet another theory stipulates that it is not necessarily that December tends to be bullish, but rather the lack of frequencies of bear market declines to begin in December that gives the month its bullish bias.
The December optimism has shown up on numerous seasonality studies, including the Stock Trader’s Almanac, American Association of Individual Investors (AAII) survey, Investor Intelligence, and other academic and professional sentiment studies.
Our technical study also confirms favorable monthly tendencies during December. For instance, in the past twenty December, the S&P 500 Index (SPX) closed the month higher 70% of the time, with average gains of 0.8%, placing it as the fifth-best month of the year. The blue-chip Dow Jones Industrial Average (INDU) closed the month higher 65% of the time, with average gains of 0.9%, ranking it as the fifth-best month. The NYSE Composite Index (NYA) closed 70% higher, with average gains of 1.2% or the third-best month of the year. The Nasdaq Composite Index (COMPQ) closed 60% higher, with average gains of 0.5% or the eighth-best month. The Nasdaq 100 Index (NDX) closed 55% higher, with average gains of 0.2% or the ninth-best month. The S&P 400 Mid-cap Index (MID) closed 70% higher, with average gains of 1.1% or the third-best month. The S&P 600 Small-cap Index (SML) closed 65% higher, with average gains of 1.4% or tied for the second-best month of the year.
Perhaps it is the combination of different factors comprising the holiday spirit, the current strong bull market trend, coupled with investors’ perception of December being less bearish that again spurs on another Santa Claus rally this year.