Santa Claus’ Time To Call

Historically, as I have been mentioning for weeks, the market is in the midst of one of the most favorable times of the year. The big picture is positive seasonality from November 1 through April 30 with November and December being especially strong. More granular, late December through early January is even better. And the traditional Santa Claus Rally (SCR) began at the close of trading on December 23rd. That’s five trading days before year-end and the first two trading days of January, ending on January 5th, 2021. During this 7 day period, stocks are “supposed” to rally.

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Why is this? We can only speculate.

However, we do know a number of factors. First, downside catalysts are hard to find this late in the year and around the holidays. Companies do not usually announce bad news during the holiday season. Big picture geopolitical events are typically quiet as the year ends. Mutual funds have already closed their books for the year and paid out those tax biting distributions. Finally, tax-loss selling, where investors with taxable accounts sell their losers to either recognize losses or to pair them up with gains taken, abates and is largely over. So, it is much more difficult to engineer anything more than a mild 1-3% pullback during the SCR period.

Remember the old adage made popular by Yale Hirsch from the Stock Trader’s Almanac? “If Santa Claus should fail to call, bears may come to Broad and Wall.” While Yale posited that a bear market would ensue if the SCR did not come to fruition, the truth of the matter is that a decline usually follows during the first half of the new year with Q1 being the most likely time. It doesn’t necessarily have to be a full-fledged bear market.

I know pundits love to pull out stats since 1950 and sometimes even back to 1928. Statistically, the more date you have in a study, the more robust the result. And while that is mostly true, I am pushing back because markets have changed and morphed and adapted so much over the decades. It’s not like pulling tens of thousands of short-term data points in 2020 or over the past few years. Heck, stocks used to trade on Saturdays in the good ole days. Stocks used to trade in fractions instead of decimals. Stocks used to trade by humans on the floor of the NYSE instead by supercomputers.

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