How will the Santa Claus Rally impact the U.S. stock market: statistics


A lot of investors and traders expect the U.S. stock market to go up during the year-end Santa Claus Rally. It’s common knowledge that the S&P 500 does well during this bullish seasonality. But just how strong is the Santa Claus Rally? Here are some statistics.
Click here to download the data in Excel. This study uses the S&P 500’s data (CLOSE $) from 1950-2016.
The Santa Claus Rally is typically seen as the last week of each year (i.e. after Christmas). However, some people define the year end rally as the final 2 weeks of each year. So I created 2 sets of data: Santa Claus Rally 1 week (last week of each year) and Santa Claus Rally 2 weeks (last 2 weeks of each year).

  1. Santa Claus Rally 1 week: median gain is +0.7%. The market goes up during 70% of the Santa Claus 1 week rallies.
  2. Santa Claus Rally 2 weeks: median gain is +1%. The market goes up during 70% of the Santa Claus 2 week rallies.

*Median is better than mean, which is influenced by outliers.
In comparison, on any given date:

  1. The S&P closes 0.2% higher than 1 week before (median).
  2. The S&P closes 0.5% higher than 2 weeks before (median).

As you can see, the year-end rally is legitimate.

  1. Santa Claus Rally 1 week outperforms a normal week by 0.5%!
  2. Santa Claus Rally 2 weeks outperforms a normal 2 week period by 0.5%!

Now there’s a chance that the Santa Claus Rally has changed over the years. Is it still applicable over the past 20 years?

  1. Santa Claus Rally 1 week: median gain in past 20 years is 0%.
  2. Santa Claus Rally 2 weeks: median gain in past 20 years is 1%.

Notice the shift here. Whereas from 1950-present the last week of each year outperformed the 2nd last week of each year, from 1997-2016 the second last week of each year outperformed the last week of each year.

Short term discretionary outlook

As of October 2017, this is the longest rally without a 6%+ “small correction”. Hence, the S&P 500 cannot go much longer without making a correction.
As shown in this study, the next correction will be a small one. It will not be a significant correction. I think this is the most likely scenario:

The S&P makes a small and quick 6-10% correction in Q1 2018.
The S&P makes a new high. Then it makes a long consolidation in the 2nd half of 2018.
The Santa Claus Rally isn’t as potent as it used to be. Perhaps the S&P will top in the last few days of 2017? Who knows.

As of today, my Medium-Long Term Model does not foresee a significant correction or a bear market for the S&P 500. This is confirmed by U.S. economic data, which is solid right now.

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