Daily Brief - The truth about Santa [market rally] (Dec 14, 2021)

Every year in December, something very special happens. It’s an event that transcends boundaries and political convictions. It is celebrated around the nation, and even the world. Untold numbers of people await it anxiously, promising to “do better” next year if only they could witness its magic one more time.

That’s right. We are talking about the Santa Claus rally.

It’s all about the last few days

December is widely known as one of the best months of the year for stocks, but many novice traders don’t realize that the majority of the gains happen in the second half of the month.

The “Santa Claus Rally” was coined a long time ago by a student of markets who noticed an anomaly of generally higher market returns between the first trading session after Christmas, and the first two trading sessions of the new year.

Ugh, are you serious - Santa is real?

Statistically speaking, it is. According to the venerated Stock Trader’s Almanac, Santa has paid Wall Street a visit 54 times since 1950. The last five trading days of December and the first two of January have combined for an average gain of 1.3%. In fact, there isn’t a single seven-day combo out of the full year that is more likely to be higher than the 77.9% hit ratio of the Santa rally.

If Santa doesn’t visit, things could get very bad …

What stands out in the statistics, however, is that the times Santa didn’t come, January was lower each time. Going back to the mid-1990s, there have been only six times Santa failed to show in December. January was lower five of those six times, and the full year had a solid gain only once (in 2016).

The bear markets of 2000 and 2008 both took place after one of the rare instances that Santa failed to show.

As Yale Hirsch, the founder of the Almanac observed: “If Santa should fail to call, bears may come to Broad and Wall.” Well, consider yourselves warned.