Date: January 5, 2016

Beware of Believing in Santa Claus

The traditional Santa Claus rally of the last five trading days of the year did not materialize. As I have mentioned before, Yale Hirsch of Stock Traders Almanac fame made popular the rhyme, “If Santa Claus should fail to call, bears may come to Broad and Wall”, meaning that bear markets typically follow in the ensuing years where there is no Santa Claus rally. While it all sounds nice and neat, the data do not support that conclusion.

In 2014, the last five days were down, but 2015, while difficult, was not a bear market year. 2012 saw Santa fail to call, but 2013 was a huge year for stocks. 2010 saw a mixed last five days which led to a flat 2011 although there was a 20% correction during the year. 2009 saw another mixed last five days, but 2010 was a strong year for stocks.

2007 was strongly down during the final five days and that correctly led to the worst year for stocks since the 1930s. 2005 also was a victory for the bears, but 2006 was a banner year for the bulls. 2002 saw a horrible close to the year, but 2003 launched a new bull market a enormous year for the stock market.

On the flip side, 2000, 2001 and 2002 were all bear market years, but the previous Santa Claus indicator failed to warn. As with many other stock market adages, what once worked and became tried and true no longer stands up to scrutiny.

I have a different method for the Santa Claus rally and I have been using this in my portfolios since the early 1990s. There are a set of rules that help identify a December low that is usually plus or minus a number of days around options expiration. From that low there has been a 90% probability of a rally into year-end over the past 25 years. The average percent gains have been staggering.

S&P 500 +2.83%

NASDAQ 100 +4.24%

Russell 2000 +4.13%

S&P 400 +4.24%

2015’s results were below average, but still between 1.33% and 1.91%.

Of note, 2015 was the first year in AT LEAST 26 years where the S&P 500 was the leading index from my December Santa Claus low to year-end. I am not sure what it means, but it’s something to watch this week.

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Paul Schatz, President, Heritage Capital