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Santa Rally
True? or Wall Street Furphy?

These days in the approach to Christmas every year, a lot is said about the so-called Santa Rally.
But is the Santa Rally (aka Christmas Rally) really real? or was it invented for some underlying alternative reason?

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Skip the introductory text and go straight to the charts below.

Introduction

In the weeks leading up to the Christmas period each year it is not uncommon to hear people talk about the so-called Santa Rally. Most of the people who initiate this discussion are the media commentators or share brokers and analysts, who perhaps have something to gain from talking about it - many people are always interested to hear these news stories.

At around Christmas time in any year, if retail investors around the world thought that a Santa Rally might be getting under way, the excitement and enthusiasm might build and they would feel compelled to participate in the rally, and rush in and buy some shares (this is the underlying emotion of greed that tends to drive many share market purchase decisions - see more about the emotions of investing).

However, perhaps the notion of a Santa Rally was actually devised by some Wall Street heavies to falsely promote participation in the markets? Shock, horror, gasp! You don't really think that do you?

Santa Rally - some definitions

Following are a couple of definitions for the Santa Rally. Generally, they tend to concur with the reputed original definition from Yale Hirsch.

The Yale Hirsch definition - The term Santa Rally is reputed to be attributed to Yale Hirsch, editor in chief of the Stock Trader's Almanac, in 1972. His definition reads as follows:

"... the last five trading days of the year plus the first two of the New Year."

Hirsch also said that the S&P500 averaged a 1.5 percent gain for that 7-day window since 1950. He offers an explanation as a buying bias by the pros after end-of-year tax loss selling. Note here that the original studies and definition referred to the S&P500 index (ie. Standard & Poor's index of the top 500 stocks on the New York Stock Exchange). Also that these observations were for the period from 1950 until 1972 - some 22 years. It could be arguable whether the phenomenon might also apply to other indexes, other markets, and later time periods.

Also note that this definition refers to a 1.5 percent gain in the index. According to classical technical analysis, if we consider a rally as an uptrend, then we are looking for higher peaks and higher troughs. According to the strict definition of a trend, is it possible to have a 1.5 percent gain over 7 trading days with an uptrend NOT in place? So perhaps we need to be careful about how we classify market movements for the purpose of spotting a Santa Rally.

And, how do we know if a Santa Rally is under way? Well, we don't! We won't know if a Santa Rally took place until the end of the 7 day period and we check the price increase over the period.

See more information: about Yale Hirsch at Amazon.com, and from Jeff Hirsch (current Editor in Chief of Stock Trader's Almanac) at Yahoo, and comments from Frank Holmes.


Investopedia offers a definition and explanation for the term Santa Rally (aka Christmas Rally):

"A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations for the Santa Claus Rally phenomenon, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week."

"Many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect."

(Source: www.investopedia.com/terms/s/santaclauseffect.asp)

The January effect mentioned in this quotation is also known as the January Barometer, and is another Wall Street cliché, which it could be argued is yet another Wall Street furphy.


Wikipedia offers the following definition:

"...a rise in stock prices in the month of December, generally seen over the final week of trading prior to the new year..."


Other sources suggest variations of this definition, including the following: "Seasonal rise in stock prices in the last week of the calendar year, between Christmas and New Year's Day." (source: www.nasdaq.com). 

Also: "A Santa Claus rally (sometimes referred to as the Santa Claus effect or the December effect) is a sharp rise in stock prices that sometimes occurs around Christmas." (source: www.techtarget.com).

See the charts below...

Possible causes

Regardless of which definition we look at, what are the possible causes of this phenomenon? Some of the offered explanations include the following:

  1. Buying bias after end of year tax loss selling - According to Yale Hirsch (see comments above). We can very well imagine that for those companies that have 31 December as their end of period reporting date, they might very well participate in some tax-loss selling to better balance their portfolio, or to write off dud stocks at an opportune time. This can lead to some stocks being perceived to be over-sold by other market participants who want to snap them up for a bargain.
  2. Anticipation of the January effect - There are some situations (in some countries) where investments in the markets in the January period need to be completed before the start of January (for accounting or tax reasons). {refer: Wikipedia.org)
  3. Window dressing - There are times during the year when some fund managers might want to open, or close, some market positions to make their portfolio performance appear better than it is. That is, to manipulate their figures in their own best interests.

More Information

eBook (PDF) Articles - For more information (in PDF format) on this topic, refer to the following eBook (PDF) Articles in the Members Area of the Share Market Toolbox (or see the free Page 1 editions):

Which index?

Why study the All Ordinaries (XAO) index and not the S&P/ASX 200 (XJO) index? The charts of these two indexes are actually very similar; and many fund managers use the 200 XJO index constituents as their "universe of investable stocks" (a list of 200). Even so, some of us believe that the broader XAO with 500 stocks provides more opportunity for retail investors (with less interference from the "big boys" and the institutional trading desks), and is therefore a little more relevant for studies like the Santa Rally.

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When does it happen?

So, exactly when is the Santa Rally supposed to be happening? The original Hirsch definition above very specifically refers to the last five trading days of the year and the first two days of the new year. This was the original definition and is rather explicit.

Some of the other definitions above state the few days from Christmas to New Year's Day, which is only a handful of trading days, and a different period to Hirsch's period. And one of the definitions above says "...around Christmas...".

So, if any market rally starts before Christmas day and ends a day or two after Christmas (or early in the New Year), is this a Santa Rally or not? Given that the original Hirsch definition referred to the S&P500 index, and the period from 1950 to 1972, perhaps we can relax the definition for other markets and other countries - like the Australian market.

How much is a "rally"?

The other consideration relates to the amount of any increase in the index. How much of an increase constitutes a rally? Hirsch noted that the S&P500 increased by 1.5 percent on average. But what if it increases only a half a percent? Is that still a rally?

Let's be honest - does it really happen?

Does the Santa Rally really happen? Well, it depends on which market you look at, and which year you consider. The price charts below of the Australian index help to consider this question; but only for recent years.

If it does happen these days in the US markets but not in Australia, is it helpful to Australian investors? We could argue that it is not helpful, unless you are investing in overseas stocks - in which case it might be useful to be aware of it. But perhaps it does happen in Australia.

Here is a relevant analysis: www.jayonthemarkets.com, and Mark Hulbert at Market Watch, and see more comment with a Google search.

See the charts below...

Observations

After considering the information above, and perusing the charts below, there are a number of possible observations and conclusions including the following:

  1. The original Santa Rally definition covered a 7 trading day period, so the weekly charts shown below are not the best when trying to discern the presence of a Santa Rally. If we relax the definition and look across more trading days, the weekly charts are still not very useful.
  2. The daily charts are more useful than the weekly charts as they show the daily close price each day, and a rally can commence at any time during a week, and can end at any time during a week. The daily time period is essential when looking for a Santa Rally according to Hirsch's definition.
  3. According to the looser definitions, a Santa Rally could occur almost anytime throughout December and into January. And in some cases it is simply a small part of a much bigger market rally.
  4. There have been recent occasions where a rally has occurred at some time in the December to January period, but it does not appear to happen any more often than in other months.
  5. According to any of the above definitions for a Santa Rally, the notion itself is not helpful to the average retail investor, and could be called a furphy. Unless we wanted to trade the index for the 7 trading days in question (which is something that many retail investors choose not to do).

Bottom line conclusion

The term Santa Rally is in common use today, and more often tends to refer to any share market rally in any market at any time in or around the month of December, and into January. However, the original (Hirsch) Santa Rally definition was a result of empirical market observations. 

The sceptics amongst us might try to argue that the Santa Rally notion continues to be peddled by "Wall Street" to give a glimmer of hope regardless of the economy, and to encourage share market investors to participate (and provide more liquidity, and to increase brokers' commissions at an otherwise quiet time of year).

See the charts below...

About the candlestick charts below

The price charts below are of the All Ordinaries (XAO) index (an aggregation of 500 stocks). These charts offer some food for thought about the existence (or not) of the Santa Rally in recent years. The first column of charts below only shows the 7-day period that Yale Hirsch referred to (see above). The second column of charts covers a period of several months, so that we can see clearly if a broader trend might have been place prior to any true Santa Rally in late December, or even during December-January. Many of the charts below are candlestick charts, which are most useful because they show the entire range in price within each day or week (a weekly line chart only shows the close price at the end of Friday, and not the range in price during the week). See more information on candlestick charts. Also, Share Market Toolbox Members can click on any chart below for a larger version in a new window.

Preamble - the December rallies 2010-2015

December market rallies over the years

Before we study the possible Santa Rally in each of the last few years (in the table below), here is an interesting and general observation about the All Ordinaries (XAO) index on the Australian market.

Notice in the weekly chart of the All Ords index at right that the following has happened in each of the five years from 2010 to 2015. At some time between mid-November and mid-December, the index formed a trough and then made an up trend (a sequence of higher peaks and higher troughs - see more about trends). The up trend ran at least 7 percent (and up to 17 percent) over the next 12 weeks (or as long as 36 weeks from December 2013).
 
In 2015, a similar event occurred, except that the rally commenced on 16 December, and lasted for nine consecutive trading days.

Some people might refer to these rallies as a Santa Rally.
December rallies over the years
Weekly chart of
All Ordinaries (XAO) index

from 2010 to 2015
Note: The percentage increases are based on the daily chart and the chart shown is a weekly.
Toolbox Members
click on the image for
a larger version.

Santa Rally - over recent years

(Toolbox Members click on any charts for a larger version in a new window)
Observations
and
comments
The Hirsch Santa Rally
7 trading days

The last 5 days of one year, and
the first 2 of the new year.
Weekly candle charts
Many of the charts in this column cover the
period August - February/March (8 months)
so it is easier to compare year to year
down the column.
Additional charts
(time period may vary)

2016

Did we see a Santa Rally in 2016?
 
17 December
: The Australian index already showed a rally from early November. Some commentators referred to this as a Santa Rally.
  
5 January: The Aussie index rallied 1.7 percent during the official Santa Rally Period.
 
20 January: A Santa Rally occurred (according to the strict Yale Hirsch definition), and for anyone in the market prior to this, the index rallied somewhat further. And the rally continued even further until the second week of January. (The index actually rose 11.8 percent from trough to peak on the daily chart - November to early January).
Santa Rally? Christmas 2016
The Yale Hirsch rally?
7 days
(daily chart)
 
A good market rally in the lead up to the official 7-day period; but what about the official 7 days? (see the chart above)

Santa Rally? Christmas 2016
July 2016 - onwards
(weekly candlestick chart)
(updated 23 December 2016)

This chart shows an uptrend in place from the time of the US Presidential election (early November). Many commentators have already called this a Santa Rally.






 (useful chart pending)

 


2015

Did we see a Santa Rally in 2015?
 
The Australian market certainly rallied for a period of time in December 2015.
 
The index rallied 8.1 percent of 9 consecutive trading days, commencing on 15 December. We could call this a Christmas Rally, or even a Santa Rally using the loose definition of the term.
 
Update: February 2016. Referring to the middle chart at right, note the bigger downtrend in place prior, and persisting after, the Santa Rally.
Santa Rally? Christmas 2015
The Yale Hirsch rally?
7 days
(daily chart)
 
A 1.4 percent increase over this 7-day period.

Santa Rally? Christmas 2015
February 2015 - February 2016
(weekly candlestick chart)

This chart shows that after hitting a resistance level below 6000 points in March-April 2015, the index trended
lower (a confirmed downtrend of
lower peaks and troughs).
We can now see clearly that the apparent Santa Rally in late December was merely a short term rally (retracement) within the bigger down trend.

Santa Rally? Christmas 2015 (relevant chart pending)
2015 - 2016
(daily candlestick chart)
 
A daily candle chart from mid-October 2015 showing a downtrend through November to a market low on 15 December. Along the way, there was a 5.2 percent rally in mid-November (retracement of the down trend).

2014

Did we see a Santa Rally in 2014?
 
The chart in the middle at right is a weekly from October 2013 and shows how weekly volumes fall off in the Christmas New Year period. On this chart we can see in August 2014 the index topped, then fell heavily into September, then rallied for a couple of weeks but failed to reach the August highs, then fell heavily in early December. At this point most people had given up hope of a Santa Rally.
 
Update: 17 January 2015. The first chart at right shows that there was no Santa rally (according to the Yale Hirsch definition), while the second chart shows a 4 percent rally over 4 weeks from mid-December to mid-January, followed by a sharp fall (of 3 percent in the latest week).
 
Update: March 2015. The third chart at right is a daily candlestick chart from November 2014 to February 2015. It clearly shows that a meaningful rally started on 21st January 2015, and the index rose with 10 consecutive white candles (the close price above the open price), with the index rising 10 percent over the 4 week period.

Santa Rally? Christmas 2014
The Yale Hirsch rally?
7 days
(daily chart)

After the seventh day of this period, the index is about where it started several days earlier. As per this definition of the Santa Rally, there was none. The chart here shows a maximum range in index value of 1.7 percent over the seven days (but this doesn't count).
Santa Rally? Christmas 2014
September 2014 - January 2015
(weekly candlestick chart)

This chart shows the index movements from a peak in mid-August, to a trough in early October, then a lower peak in early November, and another trough in early December. From this low, the index rallied 4.68 percent over four weeks until 9th January, then fell 3 percent. In the broader definition of a Santa Rally, it might be possible to argue that we have seen a rally, albeit a short one.
Santa Rally? Christmas 2014
November 2014 - February 2015
(daily candlestick chart)

A more meaningful rally started on
21 January, with the index rising 10 percent over 4 weeks. You could hardly call this a Santa Rally, but for anyone watching the market, a successful investment could have been possible.

2013

A so-called Santa Rally was evident this year.

Firstly, as defined by Hirsch (see above), we saw a 1.7 percent increase over these 7 trading days of the season (see the first chart at right). If we accept a looser definition, then we can see a short rally was underway through late December (see the other two charts). 
 
The second chart also shows a regular rally from June to November 2013 (11 percent increase), which was then followed by a short retracement in late September, then another short (4 week) rally until a top at about 5400 in late October. 


Santa Rally? Christmas 2013
The Yale Hirsch rally?
7 days
(daily chart)
Santa Rally? Christmas 2013
June 2013 - February 2014
(weekly chart)
Santa Rally? Christmas 2013
Detail
November 2013 - January 2014

(daily chart)

2012

A Santa Rally was evident in 2012, with the index trending strongly higher.
 
The second chart at right clearly shows two rallies in late 2012. A prolonged rally that started in June, until a high in mid-October and a 4-week retracement. Then a 15 week rally with only one black candle, and a rise of about 16 percent over the 15 weeks. This rally started in mid-November and topped out in early March 2013.

Santa Rally? Christmas 2012
The Yale Hirsch rally?
7 days
(daily chart)
Santa Rally? Christmas 2012
June 2012 - March 2013
(weekly chart)
 (no chart here)

2011

The first chart at right shows how the index moved over the Hirsch 7-day trading period - initially trending lower, before a sharp 2-day rally to result in a Santa Rally being completed. Actually, if it wasn't for the sharp move higher on January 4th, the Santa Rally would not have confirmed.

The second chart at right shows the bigger picture and a Symmetrical Triangle chart pattern in the period August to December 2011 - indicated by the two dotted lines which contain the price action and tend to converge (this pattern indicates progressively more agreement on price between buyers and sellers).
 
The third chart shows a general rally over the four week period in early to mid-January, and clearly shows a trend line under the rising price action from a low on 20 December (which was re-tested on 30 December). [This trend line is drawn under the daily lows to capture all traded values.] The price action first breaks down across this uptrend line on 2nd February to indicate a weakening of the trend, then closes below the trend line on the 10th. The maximum rise in this period was 6.3 percent. During February and early March the index fell to test the 4250 support level on two occasions, then rallied again to higher highs in early May, after which it fell more than 10 percent (a correction).
Santa Rally? Christmas 2011
The Yale Hirsch rally?
7 days
(daily chart)
Santa Rally? Christmas 2011
August 2011 - March 2012
(weekly chart)
Santa Rally? Christmas 2011
Detail - December 2011 - April 2012
(daily chart)

2010

The first chart at right is the Hirsch 7-day Santa Rally period, showing a decline over these 7 days - no Santa Rally.
 
This volatility over the Christmas period is not all that obvious in the second chart at right (a weekly chart); but the third chart (a daily) clearly shows the highs (and lows) within each week (the daily extremes of price).

From a low on 1st December, the index rallied 4.8 percent to a high on 23 December, then fell away on falling volumes to sit above 4800 through the first week of January. The index then rallied again to another high on 19 January, then fell away over a 2 week period, then rallied strongly yet again to a high on 17 February (well after the Christmas period). After this high, the index fell 8 percent to be lower than it's starting point on 1st December.
Santa Rally? Christmas 2010
The Yale Hirsch rally?
7 days
(daily chart)
Santa Rally? Christmas 2010
August 2010 - February 2011
(weekly chart)
Santa Rally? Christmas 2010
Detail - December 2010 - March 2011
(daily chart)

2009

The first chart at right clearly shows the Hirsch Santa Rally with higher closing prices almost every day over the 7 day period.

In the bigger picture (second chart at right) we can also see that a broader rally took place from August 2009 to early October - well before the Christmas period. Followed by lower peaks through October and November but sitting above support at about 4600.
 
In the third chart at right (a daily) we can see that an uptrend started on 10th December with a peak on 11 January - a 7.7 percent increase over 32 days (19 candles). This included a sequence of 7 strong white candles out of 8 from 22 December until 5 January. And on much lower volumes.

So much for investors and traders taking holidays over the Christmas New Year holiday period. But note the sell-off that followed in late January.
Santa Rally? Christmas 2009
The Yale Hirsch rally?
7 days
(daily chart)
Santa Rally? Christmas 2009
August 2009 - February 2010
(weekly chart - every candle summarises
the price action for one week)
Santa Rally? Christmas 2009
Detail - December 2009 - Jan 2010
(daily chart - every candle summarises
the price action for one day)

2008

The first chart at right clearly shows the Hirsch Santa Rally over that 7 day period.

However, in the bigger picture chart (the second one at right - a weekly chart) we can see a downtrend in place in the last few months of 2008 (about the time of the Lehmann Brothers issues). So, even though a down trend existed, a Santa Rally (a relief rally) still took place during this Christmas period.


Santa Rally? Christmas 2008
The Yale Hirsch rally?
7 days
(daily chart)
Santa Rally? Christmas 2008
August 2008 - February 2009
(weekly chart - every candle summarises
the price action for one week)
 (no chart here)

If you can relate to this material, you might also like to see the Finance Industry Cynic.


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