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?

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?

Remember the market sentiment - One key point made by Yale Hirsch all those years ago was that the market sentiment over this period was indicative of the likely market sentiment in the month, and the year, ahead. That is, a Santa Rally over this short period would indicate a positive market sentiment, and as we know from Dow Theory, once a bullish (or bearish) market sentiment is established (as demonstrated by a trend), it is likely to continue.

LPL Research - The LPL Financial company in the US has shared some research which says that in the majority of times when a Santa Rally has been observed, the month of January has also been positive, and conversely when Santa has not visited, it has been likely that the following month of January was lower. Read more at: LPL Financial.

Santa Rally - some definitions

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 argued 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, and at LPL Financial (USA).

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

(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):

• Article ST-6320, "Santa Rally".
• Article ST-6325, "Santa Rally - Yale Hirsch".
• Article ST-6330, "Santa Rally - More charts".

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.

ALSO...

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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.

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.