Many children have been told of the legend of Santa Claus, who is said to bring gifts to well-behaved children on Christmas.
Also known as Saint Nicholas, Santa is often depicted as a jolly old man with a white beard dressed in a red suit and sometimes riding in a sled pulled by reindeer.
Contents
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- Does The Seasonality Pattern Continue?
- When The Santa Claus Rally Does Not Come
- What Causes The Santa Claus Rally
- Final Thought
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As the children mature, they realize that Santa Claus is not real but a symbolic figure that symbolizes the spirit of generosity, joy, and kindness, as told in stories.
As traders and investors, we hear of the “Santa Claus Rally.”
The question is, do you believe in the Santa Claus rally, and is it real?
Like the stories of Saint Nicholas, various versions have arisen as the word spread from one to another.
Variations revolve around the exact time period of the rally.
Is it the month of December?
Last week of the year?
The period from Thanksgiving to Christmas?
As defined in the 1972 Stock Trader’s Almanac, the period is the final five trading days of the year and the first two trading days of the following year.
Yale Hirsch, the founder of the almanac, had coined the “Santa Claus Rally” to refer to this time period.
Jeffrey Hirsch, the son of Yale Hirsch, has continued his father’s work as Editor-in-Chief of the Stock Trader’s Almanac and president of the Hirsch Organization.
Jeffrey Hirsh published The Little Book of Stock Market Cycles in 2012.
In that book is a table listing the percent gain of the S&P 500 during the Santa Claus Rally period from 1953 to 2011.
During those years, the S&P 500 gained, on average, 1.5% during those seven days.
The Santa Claus Rally was positive for 45 out of the 58 years.
So Santa Claus Rally is a reality 78% of the time.
Does The Seasonality Pattern Continue
That was for data up to the year 2011.
What about the more recent year?
Does the market continue this seasonality pattern?
We look at the S&P 500 value during the start and end of the Santa Claus Rally period to find out:
How to read this table: The Santa Claus Rally of the year 2022, which is from December 23rd, 2022, through January 4th, 2023, returned 1% on the S&P 500 as its value rose from 3815 to 3853.
Again, the Santa Claus Rally was a reality 75% of the time (positive for 9 out of the 12 years).
However, this time, the average return was only 0.24%, possibly dragged down by the negative Santa Claus Rally returns of 2014 and 2015.
When The Santa Claus Rally Does Not Come
Some people believe that if the Santa Claus Rally does not materialize, then it will not be well forecasted for the upcoming year.
Yale Hirsh has even come up with the mnemonic:
“If Santa Claus should fail to call, bears may come to Board and Wall.”
Yet the data does not bear this out:
The Santa Claus Rally did not happen in 2023 because the S&P 500 dropped from 4754 to 4705 from December 22nd, 2023 through January 3rd, 2024.
Yet the upcoming year of 2024 was a bullish year.
Of the years listed where the Santa Claus Rally did not come, the upcoming year can still be positive more often than not.
This may be due to the positive upward drift of the market.
The broader macroeconomic and geopolitical environment influences the market, which Santa Claus Rally could not have predicted in advance.
What Causes The Santa Claus Rally
There are several hypotheses to explain the bullish market during the Santa Claus Rally timeframe:
- Extra investments into the markets due to receiving year-end bonuses.
- Investor psychology due to the positive holiday spirit
- Tax considerations
Final Thought
If you are wondering, the proper way to spell “Santa Claus” is without the “e.”
There is a 1994 movie titled “Santa Clause” starring Tim Allen.
However, that incorrect spelling (with an “e”) was intentional as it was meant as a pun on the word “clause,” as in a legal contractual clause that was central to the movie’s plot.
In some movie cover depictions, the letter “e” was colored differently to highlight this play on words.
Now that you know how to spell Santa Claus, know the exact time period of the Santa Claus Rally, and know its origins, and have seen the data, are you a Santa Claus Rally believer or denier?
We hope you enjoyed this article on the Santa Claus rally.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
Original source: https://optionstradingiq.com/the-santa-claus-rally/
