Since 1950, the S&P 500 index has climbed an average of 1.3% a year over those seven days. Most importantly, December is typically when institutional traders set their books for the year before going on vacation around the market holidays. Market holidays, in turn, usually see lighter trading volume and will typically trade sideways to higher, westernfx especially if the trend prior to the holiday is bullish. On average between 1950 and 2020, the S&P 500 rose by 1.33% during the last five trading days of December and first two of the following new year. This is significantly higher than the expected probability that the S&P 500 would increase by that amount over a seven-day trading period.

  • Coined by Yale Hirsch, founder of the Stock Trader’s Almanac, the Santa Claus Rally describes what happens over the last five trading days of the year and the first two of the next.
  • Observing the Santa Claus rally is one thing, but actually trying to profitably trade the so-called phenomenon is another matter.
  • Even though 2008 produced the largest gains in this period, the S&P 500 fell 10.95% from January 5, 2009, at the end of the rally, to January 31, 2009.
  • If we look at historical data, we see evidence that this type of rally can occur.

The January Effect is believed to be the result of tax-loss selling in December to lock in losses, followed by repurchases in January, in compliance with the 30-day ‘wash-sale’ rules set by the IRS for taking capital losses. A Santa Claus Rally is a seasonal stock market trend that often occurs near the end of the fiscal year. The stock market often yields positive returns during the last five business days of December and the first two business days of the new year, although this is by no means guaranteed.

The Santa Claus Rally

Given the small sample size, the rate of Santa Claus rallies during recessions is roughly comparable to the typical rate of 79%. While the Santa Claus Rally was originally defined as lasting just seven days, some analysts and commentators tend to use the term more broadly to refer to longer time periods or even the entire month of December. Using the week leading up to Dec. 24 over two decades, aafx trading review we find there is no tangible or reliable Santa Claus rally. Whether you count that time period or the week after Dec. 25 up to Jan. 2 of the new year, the returns are negligible, if slightly positive at +0.385%. 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.

“That is a very small move, less than 1%,” Alec Young, chief investment officer at Tactical Alpha, told me. “That is a day’s trading. Even if we chop around for a few days, we can still do it.” The bear narrative, of course, is that omicron will lead to more persistent inflation issues. Bulls have been keeping a close eye on one of the final data points for the week — Thursday’s release of the November Personal Consumption Expenditure (PCE) deflator, the Fed’s preferred tool for examining inflation.

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The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on, top-rated podcasts, and non-profit The Motley Fool Foundation. Observing the Santa Claus rally is one thing, but actually trying to profitably trade the so-called phenomenon is another matter. This would be an especially good year for a Santa rally to work its magic. The S&P 500 is down about 16% over the past 12 months, while the Dow has slipped about 6% over the same time frame. A rally of anywhere from 2% to 5% would do wonders to boost investments heading into 2023.

Will There Be a Santa Claus Rally This Year?

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What Does the Santa Claus Effect Mean for Traders?

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It was first observed by Yale Hirsch in the 1972 version of The Stock Trader’s Almanac. Interestingly, the Santa Claus rally is observed in stock markets around the world. For example, the Indian stock market exhibits a similar effect, where the last five trading days of December and the first two trading days of January tend to produce higher average returns than other days. Given such a small historical return, and a marginally positive frequency of occurrences, traders should be extremely cautious about buying or selling based on the supposed Santa Claus rally. While Santa Claus can be counted on to deliver the presents on Christmas, the stock market cannot be relied upon to always deliver gifts.

The U.S. stock market hit record highs leading up to Thanksgiving in 2020. Two days before the holiday this year, the Dow Jones and S&P 500 indexes broke 30,000 and 3,600 points, respectively. While some stock analysts and investors are concerned that these prices belie a frothy market soon set to pop, others speculate that highs will continue over the next month. In the investing world, the uptick in stock market performance at the end of the year is commonly referred to as the Santa Claus rally, gifting investors jolly gains in their portfolios.

Of the average winning day in the period, the return was +1.85%, while the average losing day was -3.28%. Over the last 20 years of following the Santa Claus rally proposition, the average return was only +0.385%, which we do not consider a viable trade opportunity for any but the most nimble of traders. Some believe that the rally introduction to devops and the top 10 tools used in devops methodology 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.

None of this is useful for most investors who do not have the trading experience to manage risk in such short time frames. For buy-and-hold investors and those saving for retirement in 401(k) plans, for example, the Santa Claus rally does little to either help or hurt them over the long term. It is an interesting news headline happening on the periphery but not a reason to become either more bullish or bearish.

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What a Santa Claus Rally Could Mean for Your Investments This Year

The other scenario suggests the Santa Claus rally occurs in the week following Christmas, up to and including the first two trading days of the New Year. After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas. Since 1950, the S&P 500 has gained an average of 1.3% during the seven-day period in which the rally takes place, and it’s gained in 34 of the past 45 years. However, there is no clear cause for the Santa Claus rally, and there’s no guarantee that it will continue.

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