The Numbers Behind The Santa Claus Rally
Go on vacation during the Holidays and you come back with the stock market blazing. Naturally this brings us back to some of the seasonal quirks of the stock market. One that comes to mind is the Santa Claus Rally.
Is it real? Is it something you should really consider going into the year end?
While there is no true recurring pattern in the market, there are certain trends that do often occur based on the time of year. It’s the same reason, why you can’t find an open treadmill at the gym in January more than any other month of the year. We can always count on those pesky New Years resolutions to workout more going into the new year. Then after a month straight of hitting the weights and strapping on a pair of running shoes, the gyms are empty again in February.
It’s like clockwork!
This is the type of occurrence which stems from specific events (Black Friday and Christmas) that all traders need to be aware of. Keep in mind, these events on their own are not strong enough to overtake overall market conditions and sentiments like a “fiscal cliff” or a strong recession. However, they do bring a boost in an otherwise “normal” market.
The Truth About The Stock Market
When analyzing the past 40 years from 1971 to 2010. You can actually see the “Santa Claus Rally” in the works.
Source: Squirrels.com
The data aggregated for this model was collected from Yahoo Finance. It takes into account the month’s opening market value and the month’s ending market value. The entire report can be found HERE.
Interesting enough, the fact is that most of us have short-term memories and can only remember the ups and downs of the recent financial collapse. So let’s take a look at the annualized monthly returns of the past 10 years.
Source: Squirrels.com
It’s safe to say that the last 10 years have not been so rosy for investors. In fact, the overall compounded annual growth rate for the S&P 500 as of New Years Day 2002 through New Years Day 2012 is a measly 1.1% growth rate. That rate is lower than inflation.
By looking at the past 10 years, it makes you wonder whatever happened to the given 7% stock market return we have all been gauging our investments off of over the years.
It’s important to note that if you look at the November and December data point, you’ll notice a solid green 2-month stretch. Obviously, it’s not guaranteed that you will finish in the green; however, based on historical returns, should you decide to invest or stay bullish for 2 months out of the year, November and December are two consecutive months you should take a long deep look at.
So based on this data, the Santa Claus rally would appear to be a real stock market phenomena. Of course you should not base your due diligence solely on that. You would still need to look at Black Friday reports, secular bull markets, technical analysis, and whatever it is that you do to make a trading decision. And if all indicators are a go, this year end market tendency is just gravy on top.
Do you believe in the Santa Claus Rally? At San Jose Options, by simply looking at the data, we do.
