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"If Santa Claus should fail to call,
Bears may come to Broad & Wall"
– Old Wall Street Saying, unattributed
If you, like me, follow NORAD's delightful "Santa Tracker" each year, you are aware that the jolly old saint has now circled the globe and he and his reindeer are enjoying a well-deserved rest back at the North Pole.
But for traders, Santa has one more stop to make… in January.
The first major tax reform in 31 years is now in the books, and the markets have even more giddiness heading into the Christmas holiday than usual. Any attempt to "sell the news" of the tax reform has been met with buying, and no significant sell-off has been seen.
I was on FOX Business Network's "Varney & Co." show last week and was asked by host Stuart Varney whether I thought the president signing the tax bill into law on Dec. 24 was a "sell the news moment."
I responded that with a lowered tax regime coming on Jan. 1, my belief is that people and institutions will defer profit taking at the end of December into the new year. While I believe that we could get a very small "sell the news" effect, I believe that this bigger "defer profits into the new year" thought will be a stronger driver.
Plus, we have a strong seasonal effect coming up that I alluded to in the opening quote – next week kicks off the short but historically positive Santa Claus rally…
Santa Claus Rally Statistics
As NORAD has proved, with their high-tech cameras and 3D imaging, tracking Santa is a far more involved science than one might first suppose. So, we too, approach the Santa Claus rally with all due rigor…
In their well-known Stock Trader's Almanac, Hirsch and Hirsch explored why end-of-year trading has a directional tendency, and they proposed the Santa Claus indicator (they also provided the epigram that opens this article).
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. What we find are some compelling stats.
Since 1969, this seven-day period has returned positive results in 35 out of 48 years for a 73% win rate and an average gain of 1.6%. Looking back another 20 years shows that the seasonal move holds up with a similar percentage of wins, but a modestly reduced average gain.
Santa Claus Rally Fundamentals
As with any seasonal tendency, I take a look at the fundamentals behind the data. In this case, we have two supporting cases for the short-term trend – strong investor psychology and a very tangible institutional money reality as well.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.