As 2017 winds down, we still have one of the most well-known trading axioms left—“The Santa Claus Rally.” This is also known as the “December Effect,” first noted by Yale Hirsh in his Stock Trader’s Almanac in 1972. But here’s the catch: The Santa Claus Rally isn’t talking about the entire month of December as many think, it is only the last five trading days of the year and the first two trading days of the following year. In other words, this starts tomorrow!
So, should you believe in Santa? Going back to 1950 on the S&P 500 Index, the Santa Claus Rally is the second strongest seven-day period of the year. Per Ryan Detrick, Senior Market Strategist, “The days during the Santa Claus Rally have gained 1.35% on average, with only one other seven-day period of the entire year sporting a better return. Not to be outdone, the 7 days of Santa have been higher 77.6% of the time, making it the 7 days of the year that are most likely to be higher. Are you a believer yet?”
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One other interesting note is that in the rare instance that the market gets a lump of coal instead of a Santa Claus Rally, that usually means there could be weakness in January. You can call it a potential indicator that something could be wrong. In fact, over the past 20 years, 5 have seen coal and sure enough, January was lower every single time.
Article by LPL Research