Forex Trading

What Is the Santa Claus Rally? The Motley Fool

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. The Santa Claus rally occurs when stocks rise over a seven-day trading period—starting the last five simple forex trading strategy trading days of a year and continuing into the first two trading days of January in the following year. A Santa Clause rally is observed if the stock markets gain in the last five trading days of the year, going into the first two trading days of the following year. Depending on when weekends fall in a particular calendar year, the start of a Santa Claus rally could be before or after Christmas Day.

If there’s a Santa Claus rally to end a year, the next year is expected to be good. The study also examined returns in 15 other developed countries, so the total sample included eight countries where a majority of residents identify as Christian and eight where they don’t. The flaw with this theory is that there is no single time of year when most corporations pay bonuses; it varies by company.

  1. Second, if the Santa Claus period is such a great time to be active in the stock market, it seems unlikely that institutional investors would blow it off.
  2. 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.
  3. 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%.
  4. Some investors use the existence of Santa Claus rallies as indicators for the coming year.
  5. We do not include the universe of companies or financial offers that may be available to you.
  6. For example, in 2018, the S&P 500 fell through much of the fourth quarter as Treasury yields rose.

The unlikeliness of the government or regulators announcing any bad news during the holidays may be the driving force behind this optimism. First, institutional investors aren’t necessarily doing a lot of short selling in the first place. Second, if the Santa Claus period is such a great time to be active in the stock market, it seems unlikely that institutional investors would blow it off. Some market observers may also make forecasts based on whether or not a Santa Claus rally occurs. 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. A Santa Claus rally is the sustained increase in the stock market that occurs around the Christmas holiday on Dec. 25.

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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. Over the years, many analysts have tried to speculate about the reasons for the Santa Claus rally. The perceived https://www.forexbox.info/cybersecurity-stocks-to-buy-and-watch/ 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. Some researchers believe one reason for the Santa Claus rally is bullish investors’ sentiment as people are generally optimistic around the holiday season.

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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. A ‘Santa Claus Rally’ is a term used to describe the phenomenon where the stock market jumps in value during the last week of December and into the first two trading days of https://www.day-trading.info/why-its-a-mistake-to-cash-out-of-bonds-when-rates/ the new year. There are a number of theories as to why this happens – from tax considerations to investors buying stocks with their holiday bonuses. 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.

What Is the January Barometer?

The January Barometer is a theory that claims that the returns experienced in the January stock market predict the performance of the market for the upcoming year. While Santa Claus can be counted on to deliver the presents on Christmas, the stock market cannot be relied upon for gifts. Any positive gain in the stock market around Christmas commonly leads financial market observers to refer to the Santa Claus rally.

When does the Santa Claus rally start?

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. Stocks usually rise over the last five days at the end of the year and the first two days of the following year. Based on the results since 1994, the behavior of stocks during the Santa Claus rally is also usually an accurate predictor of the direction of the stock market for the following year. Generally, the Santa Claus rally refers to the stock market’s history of rising over the last five trading days of the year and the first two market days of the new year. 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%.

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. 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. Some investors may be executing tax-loss harvesting and repurchases or investing year-end cash bonuses into the market.

If you’d like to draw your own conclusions, here are some additional points to consider. Each year, when the days are at their shortest and retail workers’ shifts are at their longest, market pundits speculate about the likelihood and magnitude of a year-end surge in stock prices. For buy-and-hold investors and those saving for retirement in 401(k) plans, the Santa Claus rally does little to help or hurt them over the long term. It is a news headline happening on the periphery but not a reason to become more bullish or bearish during Santa Claus rallies or the January Effect.

It’s not fully clear whether it’s purely psychological or there are some underlying financial reasons for the year-end rally, but history has shown that stocks tend to gain at the end of the year and into the first days of January. 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.

By definition, the Santa Claus rally refers to gains in the market that typically happen in the last five days in one year and the first two days of the next. The term is sometimes used to refer to any rally that takes place around the end of the year. In 2018, the S&P 500 finished the month with a 6.6% gain after December 24, which were the last four trading days of the month. Although the index fell on Jan. 3 — the second day of the new year — December 24 proved to be the market bottom. Yale Hirsch first documented the pattern in 1972, writing in “Stock Trader’s Almanac” that the S&P 500 had gained an average 1.5% during that seven-day period from 1950 through 1971. The pattern has held true since 1950, with the broad market index increasing an average of 1.3%.

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