The Santa Claus rally has a long tradition dating back to 1969. This the period from the last week of December to the first two trading days of January. The bullish tradition has been long-standing, and the question remains about what 2020 will bring. Many are hoping for that tradition to continue for old times sake or for “auld lang syne.”

Santa Claus Rally History

If history is any indication, Santa Claus should come to town unless we’re in a bear market. According to the Stock Trader’s Almanac, the market has produced a negative return only 12 times since 1969 with an average return on 1.3%! On top of the positive returns, the market typically rallies each of the seven cheerful days. That’s an incredible history and certainly places the odds in the bull’s favor.

Looking back at the last six coal-packed holiday seasons, there has been a consistent trend for the coming year. These years were followed by three flat years (1994, 2004, and 2015), and two bear markets in 2000 and 2008. That means that Santa delivers the coal in anticipation of bad behavior from the market.

Santa Claus Rally Dynamics

There are many theories that underpin the history of the Santa Claus Rally. Here are a few things to consider:

• Lack of liquidity and optimism
• Holiday shopping
• Institutional investors on vacation
• Holiday bonuses
• Jubilation
• Rudolph’s red nose leading Santa’s sleigh

As a technician, cycles and history are important indicators. However, the why’s aren’t always relevant. As a result, I’m content with Rudolph’s red nose as anything else. For me, it’s a lot easier to sit back this time of year and see what Santa brings. The trend leading into 2021 will be a lot more significant than trying to make money on Santa delivering in 2020. After all, if 2020 was a slide, it would be a cheese grater. Ouch!

Santa Claus Rally as a Barometer

It seems like many are looking with anticipation to 2021 and the Santa Claus Rally result may be a good indicator. If you saw Kristin Wiig’s 2020 holiday monologue on Saturday Night Live, in the skit, she was surprised that 2020 doesn’t end in 2021. I’m sure many are looking with hope at a new dawn on January 1.

There are a couple of other seasonal trends that kick off in January that this period may be an early indicator for. First, there is the January Effect. This is a general trend that looks for a rise in stock prices during the month of January and small cap stocks typically outperform. The other is the January Barometer, which says that January sets the tone for the rest of the year.

Conclusion

Since November 30, the market has been flat on its back and the Santa Clause Rally may do the same. However, if there is a more significant move this year, it could be a major road sign to a continuation of a bull market or an emerging bear.