The Santa Claus Rally –  A Well-Known Recurring Phenomenon

every year a certain stock market phenomenon is said to recur, anticipated with excitement by investors: the so-called Santa Claus rally. It is held that stock prices typically rise quite frequently and particularly strongly just before the turn of the year.

I want to show you the Santa Claus rally using the Dow Jones Industrial Average (DJIA) as an example. The DJIA has a very long history and is therefore particularly useful for conducting a long-term analysis.

 

Santa Claus, usually known as a reliable purveyor of presents, occasionally steps on something. When he does, it can be fatal. That said, December crashes are historically so rare, one needs only one finger to count them. When the NYSE reopened in December of 1914 after having been closed for several months following the outbreak of WW1, it did so with a~40% gap down – however, the market quickly recovered as war-time inflation began to boost prices. By early 1916 the market was trading at new highs. [PT]

 

Recurring Trends can be Discerned at a Glance on a Seasonal Chart

The chart below is not a standard chart that depicts a price trend over a specific time period. Rather, this seasonal chart shows the typical seasonal pattern of the DJIA. Specifically, it illustrates the average returns generated by the index in the course of a calendar year over the past 119 years. The horizontal axis shows the time of the year, the vertical axis shows the price information indexed to 100.

 

DJIA, seasonal pattern over the past 119 years – the Santa Claus rally starts in mid-December

 

Due to the very long time period under review, the chart is an excellent reflection of seasonal trends that are stable in the long term – random patterns are pushed into the background.

 

Stock Prices Post Disproportionately Large Gains During the Christmas Season

The positive seasonal time period at the end of the year is highlighted in dark blue on the chart. The Santa Claus rally starts on December 17 and typically lasts until January 6 of the following year.

The average return achieved in this time period amounted to 2.08 percentage points – a gain generated in just 20 calendar days. Thus the Santa Claus rally generated an average annualized gain of 45.52 percent!

For comparison: in the rest of the time the annualized gain of the DJIA amounted to a mere 3.21 percent.

In short, the seasonal trend around the Christmas holidays is quite extraordinary.

One often cited reason for the stock market rally at the end of the year is window dressing by investment funds – i.e., investment funds support prices at the end of the year in order to prettify their results – which has the purely coincidental side-effect of boosting bonus payments, which are often calculated and paid at the turn of the year. Psychological reasons are likely playing a part as well, as the positive holiday mood and the strong desire to buy things (such as Christmas presents) spill over into stock markets.

 

However: Prices Sometimes Decline as Well

Is a decline in stock prices possible in this traditionally positive environment? To find out one must take a close look at the results recorded in individual years.

The following bar chart illustrates the pattern returns for the time period Dec. 17 to Jan. 06 for all years since 1900. Green bars indicate gains, red bars losses.

 

DJIA, percentage return achieved between 17 Dec. and 06 Jan in individual years since 1900. In most years the DJIA rallies at the end of the year.

 

As the detailed breakdown illustrates, green bars clearly dominate both in frequency and extent. The Santa Claus rally took place in 94 of the past 118 years. By contrast, there were only 24 years in which the Santa Claus rally failed to occur.

 

Will the Shenanigans of Trump and Xi Outweigh the Santa Claus Effect?

However, these cases demonstrate that declines are definitely possible as well. Seasonal statistics can be very helpful in boosting the probability of achieving positive investment returns, but there are also other factors impacting prices. Rising interest rates, the break of important support trendlines and the recent escalation in the trade dispute between the US and China could well put additional pressure on stock prices in coming weeks.

In other words, there is a risk that US president Trump and his Chinese counterpart Xi Jinping could overwhelm Santa’s influence this year. That should not discourage you from looking at seasonal trends. Seasonality does not lay claim to being correct in every instance; rather, it is a method for the analysis of probabilities. As an aside, a number of other instruments, in particular currencies, also exhibit noteworthy seasonal trends at the end of the year.

Simply navigate to www.app.seasonax.com to find out more (alternatively call up the Seasonax app by typing “APPS SEASON” into your Bloomberg Professional Terminal or via the App Studio in the menu of Thomson-Reuters Eikon). There are tradable instruments exhibiting noteworthy individual seasonal trends in all time periods of the year. Many of them remain unknown to most investors.

There is never a guarantee in the markets, and that also holds for seasonal patterns – but you can definitely let probabilities work in your favor. Treat yourself to a present in the form of improved returns through the use of seasonal patterns!

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com , which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange.

You can find an introduction to the Seasonax app and in-depth information on what it can do here. Furthermore, here is a complementary page on the web-based Seasonax app, which costs less and offers slightly different functionality (note: subscriptions through Acting Man qualify for special discounts – for both the Bloomberg/Reuters and the web-based versions of the app. Details are available on request – simply write a note to info@acting-man.com with the header Seasonax!).

 

Charts by: app.seasonax.com

 

Image caption & editing by PT

 

 

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