The Santa Claus Rally Has Begun So Take Advantage Of It!

…[T]he so-called Santa Claus Rally reflects the tendency of stocks to rally higher around the Christmas holidays… but is this phenomenon just fiction or is there something behind it?…In search of proof, I went far back into history and analyzed a 126 year seasonal chart of the Dow Jones Industrial Average Index. [Here’s what I determined.]

An edited ([ ]) and abridged (…) version by Lorimer Wilson, Managing Editor of munKNEE.com of an article by Dimitri Speck to provide greater clarity and conciseness for a faster and easier read.

Over the last 126 years, the Santa Claus Rally began on December 15 and typically ended on January 09 of the next year…and what is most astonishing is that the Santa Claus Rally generated an annualized return of 40.40% delivered in the 17 [trading] days [during that time period….[as compared to] the average annualized gain of the Dow Jones Index during the rest of the time… [of] just 3.17%. Furthermore, prices rose 78% of the time during that 126 year period.

What Drives the Santa Claus Rally?

Here are a few explanations for this seasonal phenomenon:

• Window dressing by investment funds is an often cited reason for the end-of-year stock market rally. In other words, investment funds are supporting prices at the year-end in order to embellish their results, with the (purely coincidental but undoubtedly welcome) side-effect of boosting bonus payments, which are often calculated at the turn of the year.
• However, although less obvious, psychological reasons are probably more often an important factor. These include the fact that:
  • most people tend to take stock at the end of the year and position themselves for the new year…[and]
  • there is the…holiday effect, which demonstrably tends to lead to stock market rallies ahead of other holidays as well.

This is a reason we all can relate to, as Christmas shopping and good spirits appear to be spilling over into the stock market as well.

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