Share Market Toolbox
These days in the approach to
year, a lot is said about the
so-called Santa Rally.
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?Santa Rally. Generally, they tend to concur with the reputed original definition from Yale Hirsch.
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 arguable 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.
Investopedia offers a definition and explanation for the term Santa Rally (aka Christmas Rally):
"A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations for the Santa Claus Rally phenomenon, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week."
"Many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect."
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).
Regardless of which definition we look at, what are the possible causes of this phenomenon? Some of the offered explanations include the following:
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):
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.
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Preamble - the December rallies 2010-2015
If you can relate to this material, you might also like to see the Finance Industry Cynic.
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