Let me begin by wishing all those who celebrate a Merry Christmas and Happy Hanukah!
Historically, the last two weeks of December is one of the most favorable times of the year and that lasts through early January. The traditional Santa Claus Rally (SCR) is scheduled to begin on Christmas Eve and last until the close on January 3rd. In other words, the last five trading days of the year and first two of the new year.
Remember the old adage made popular by Yale Hirsch from the Stock Trader’s Almanac? “If Santa Claus should fail to call, bears may come to Broad and Wall.” Well, I am not going to go into that now. Let’s see if Santa decides to reward all his little investors. I will quickly say that while Yale posited that a bear market would ensue without Santa, the truth of the matter is that a decline usually follows during the first half of the new year with Q1 being the most likely time.
For my research, I separate the SCR from the last five trading days of the year (L5). While they have significant overlap, we often see larger than normal moves during this time and SCR and L5 can yield different results. What I try to assess is what is likely to occur over SCR and L5 each year based on the stock market’s performance during Q4 to date as well year to date.
2019 is very much the opposite of 2018. Going into this period last year, Q4 and 2018 were negative which led to positive SCR and L5. This year, we have Q4 and 2019 being very strongly higher as we enter SCR and L5.
Based on history and a little filter I added, here are the probabilities of higher prices.
Using just Q4, there is a 68% chance SCR is positive and only 42% chance L5 is positive.
Using 2019 YTD, there is a 71% chance SCR is positive and only 40% chance L5 is positive.
This says that putting new money to work for what is perceived to be a slam dunk into year-end is anything but. However, if L5 is negative or if there is a a quick rinse lower, there is a better likelihood that stocks bounce the first two days of 2020. I know. I know. Who really cares about the next 7 trading days? You’re right, but it’s still interesting to analyze.
