"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.
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On the psychology side, investors and traders are certainly influenced by the mood of the season. Whether you celebrate Christmas or not, it is undeniably the United State's most permeating holiday, with a well-promoted theme of joy and good cheer. It is followed up one week later by New Year's Eve/Day - a near-universal celebration in the Western world. Spirits are high, and optimism is the dominating mood of both of these holidays.
On the institutional side, there is a well-known phenomenon of last-minute trading to make portfolio returns look better with techniques that fall under the broad term of "window dressing." This can range from fairly benign practices like adding hot stocks to the portfolio (so that it looks like the manager was in them all along) to more controversial practices, such as bidding up stocks that are already in the portfolio. Here's some interesting research on the subject reported by Jason Zweig:
"A Wall Street Journal analysis of daily trading in roughly 10,000 stocks since 2004 found that on the final trading day of each quarter, there was a sharp increase in the number of stocks that beat the market by at least five percentage points, then trailed it by three points or more the next trading day."
While that particular practice takes place mostly in thinly traded stocks, the general yearning for stronger results at the end of the quarter and especially at the end of the year certainly adds to the consistency of the Santa Claus rally.
There is also the simple reality that institutions and funds have new money coming into them during the first couple of days of the quarter and of the new year. Money from automatically funded accounts (pensions) and other systematic contributions has to be put to work. This well-known money flow effect causes the first two days of the month and quarter to be better performers on average than any other two-day period.
So putting the fundamentals and the statistics together, the Santa Claus rally does seem to have validity and should be taken into consideration as an input (but not the only input!) for your investing and trading decisions.
The past few years have given us some strong outside influences during this period, from fiscal cliffs to poor China growth numbers. Seasonal tendencies - even ones with strong histories - are not immune to significant global news. This year's tax reform will perhaps be a positive influence.
And I believe that we will have the opportunity to see a strong push up for prices into the new year.
Whatever your spiritual tradition, I hope that all the hope, love, and joy of this season are with you, your families, and your friends! And may you have a happy and prosperous new year!
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The post Santa Claus Arrives on Wall Street Next Week appeared first on 10-Minute Millionaire.
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.