Technically Speaking: Will “Santa Claus” Visit “Broad & Wall”

As we start moving into the last two weeks of the trading year, investors everywhere are hopeful that “Santa Claus” will visit “Broad & Wall.” 

The actual Wall Street saying is that “If Santa Claus should fail to call, bears may come to Broad & Wall.” The Santa Claus Rally, also known as the December effect, is a term for more frequent than average stock market gains as the year winds down. However, as is always the case with data, average returns are sometimes different than reality.

Stock Trader’s Almanac explored why end-of-year trading has a directional tendency. The Santa Claus indicator is pretty simple. It looks at market performance over a seven day trading period – the last five trading days of the current trading year and the first two trading days of the New Year. The stats are compelling.

The stock market has risen 1.3% on average during the 7 trading days in question since both 1950 and 1969. Over the 7 trading days in question, stock prices have historically risen 76% of the time, which is far more than the average performance over a 7-day period.

As I said, while it is a very high probability that stock prices will climb, there is a not-so-insignificant 24% chance they won’t. Such is why we want to analyze the technical backdrop to minimize the risk of “getting a lump of coal.”

However, let’s first analyze the “Santa Claus Rally.”

The Santa Claus Rally

A couple of years ago, my partner, Michael Lebowitz, dug into the December statistics to validate the “Santa Claus” rally. For this analysis, we studied data from 1990 to current to see if December is a better period to hold stocks than other months. The answer was a resounding, “YES.” The 30 Decembers from 1990 to 2020 had an average monthly return of +1.70%. The other 11 months posted an average return of just +0.62%.

The following graph shows the monthly returns and the maximum and minimum intra-month returns for each December since 1990. It is worth noting that more than a third of the data points have returns that are below the average for the non-December months (+0.62%). Further, it is worth noting that 2018 certainly saw a “lump of coal” in investors’ stockings.

(Click on image to enlarge)

Santa Claus Broad Wall, Technically Speaking: Will “Santa Claus” Visit “Broad & Wall”

Next, we analyzed the data to explore if there are periods within December with price gain clusters. The following two graphs show, in orange, aggregate cumulative returns by day count for the 30 Decembers we analyzed. In the first graph, we plotted returns alongside daily aggregated average returns by day. Illustrated in the second graph is the percentage of positive days versus negative days by day count and returns.

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