The Stock Trader's Almanac states that the Santa Claus rally is a seasonal trading phenomenon that typically occurs in the last week of December that continues through the first two trading days of the New Year in January. The seven-day trading window or the Santa Claus rally suggests a historical tendency for the stock market to rally.
Some of the theories surrounding this bullish condition are optimism ahead of the holidays, increased holiday shopping, favorable year-end window dressing from professional investors, and short-term traders buying in anticipation of the January Effect, another bullish seasonable trading pattern in the stock market.
Regardless of the reasons for this short-term bullish condition, history has shown the Santa Claus rally has produced positive gains for traders over the past 50-years. The last five trading days of the year plus the first two trading days of the New Year have resulted in gains for SPX in 38 out of the past 50 years.
This year, the Santa Claus rally starts on Thursday, December 24, 2020, and ends on Tuesday, January 5, 2021. It is off to a good start. S&P 500 Index (SPX -3,703.06) has gained 0.35%.
Since 1969, the SPX Index is up 76% of the time, averaging a 1.3% return for the 7-day window. The track record is not only impressive, but it is one of the best short-term seasonal trading indicators around. If history repeats itself this year, then a hypothetical return of 1.3% applied to an SPX close of 3,690.01 (12/23/20 close) renders a target of 3,738 by January 5, 2021.
Although the Santa Claus Rally portrays the stock market in a favorable light, it can also be an excellent warning indicator. If the Santa Claus rally fails to materialize, the coming year may witness a weak start or suffers a volatile trading period during the early parts of next year.
For instance, Santa Claus failed to develop 6 times since the mid-1990s. SPX subsequently produced 3 flat years (1994, 2004, and 2015), 2 severe bear markets (2000 and 2008), and 1 moderate bear market that ended in February of 2016.
So, can we expect SPX to continue with its strong rally over the next 6 trading days, leading to another positive year? Or will a no-show warn of a flat to a down year for stocks next year?
Please refer to the attached statistics for further information.
Wishing you all a safe and Happy Holiday Season.