The Santa Claus Rally

The Santa Claus Rally

$DXJ, $SPY

In Y 1972, Yale Hirsch, a stock market analyst and author of the annually published book titled “Stock Trader’s Almanac,” identified and named an apparent stock market anomaly.

He called it the Santa Claus Rally because it usually occurred during a 6-session stretch beginning with the 1st trading session after Christmas day and ending with the 1st days of the new year. 

The stock market’s performance during these 6-day frames includes the last few trading days of the year. In fact, the final week of the year typically trades on the lowest volume of any throughout the prior year. With vacations and holiday activity, the only people who trade on these days have a need to do so. Those 2 facts alone make it worth consideration for a period of time that would have unique characteristics compared to the rest of the year.

The chart below shows an example of the timing of the Santa Claus Rally. This example takes place from the end of the year in Y 2008 to the beginning of Y 2009, and it was a rally with the best historic returns.

Chart showing 2008-2009 Santa Claus rally

Historic Santa Claus Rally Performance

While some have disputed that the Santa Claus Rally is as much a myth as its namesake, the data speaks for itself.

Mr. Hirsch tracked the rally all the way back to Y 1896 using the Dow Jones Industrial Average (DJX). However, you can download and check more readily available data. Simply reviewing the closing price data of State Street’s S&P 500 Index fund (SPY) will allow the observer to calculate the return of holding from the close before that 6-day stretch to the final close of those days. Doing so shows some interesting returns.

Not all years produce a winner.

The chart below shows the worst-performing turn of the year in the past 30 yrs, that of Y’s 2007-2008.

However, the Santa Claus Rally produce a gain more often than a loss. In fact, since the inception of SPY in Y 1993, the Santa Claus rally has produced a gainer 17 out of 26Xs, about 65%.

Chart showing 2007-2008 Santa Claus rally

Over the years, analysts have tried to speculate about the reasons for the Santa Claus Rally and why it should persist for over a 100 yrs, and even show up so strongly in more modern, ETF-driven markets.

A possible explanation may be found in a few academic studies that have documented the turn-of-month effect. This is the concept that stocks tend to rise after the end of the month and perform well in the 1st days of a new calendar month. There is ample data to suggest that this is a persistent phenomenon.

If we consider that the Santa Claus Rally is a year-end version of this effect, it may be the case that the more determined crowd making trades during that frame tends to generate more positive returns.

Whatever the actual reason, a comparison of the returns from trading the rally on SPY over the past 26 yrs shows a pretty dramatic story.

The chart below compares the results of trading any random 6-day period in the past 26 yrs with the results of trading 2 kinds of 6-day groupings. The 1st is the turn-of-month effect, 4 sessions at the end of a month and 2 sessions into the next month. The 2nd is specifically the returns from trading the Santa Claus rally. 

Returns of the Santa Claus rally

The Bottom Line

Trading any random 6-day stretch on SPY over the past 26 yrs produces a positive return 58% of the time. But trading the 4 days at the end of the month and 2 days in the next actually produces winners 64% of the time. The Santa Claus Rally bests both of these with 65% winners and produces demonstrably better returns, as shown in the chart above.

Have a super New Year’s week

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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