‘Santa Claus’ rally, anyone? Why some 7-session stretches are better for the stock market

Santa Claus may not be coming to town due to the pandemic, but he will pay a socially distant visit to Wall Street stock brokers if the story is any guide.

The shares performed extremely well during a seasonal period that includes the last five trading days of the year and the first two sessions of the new year, in what came to be known as the “Santa Claus” high.

This period, which begins on Thursday of this year, is considered one of the best seven-day extensions for shares at any time of the year, with an average return of 1.3%, the second best performance among any seven-day period in one year. The range also ended up positive at almost 78% from around 250 trading sessions, according to Ryan Detrick, chief market strategist at LPL Financial, in a research note on Wednesday (table below).

Source: LPL Financial

Detrick says it’s not exactly clear why this stretch of December historically proves such a good period on average, but some speculate that institutions are straightening their books at the end of the year, consumer spending on holiday driving corporate sales, decreasing trading volumes with many holiday investors and optimism for the coming year may be factors in the rise that spreads across financial markets.

“The end result is that bulls tend to believe in Santa Claus,” he writes.

It may be hard to have faith that the stock will gather a second round of gains after a major recovery from the lows seen in March, when the coronavirus pandemic hit and another hike to this point in December.

The Dow Jones Industrial Average DJIA,
+ 0.38%
has already risen about 2% so far in the month, the S&P 500 SPX index,
+ 0.07%
rose 2.4% in the period and the Nasdaq Composite Index COMP,
rose 5.2% so far in December.

Detrick said there are reasons to believe that there is another stage in the rally, because December tends to start relatively slowly and gain momentum at the end of the year.

Source: LPL Financial

Investors are concerned about the market’s ability to sustain its almost uninterrupted rise to records and high ratings amid the resurgence of the pandemic COVID-19 in parts of the world and signs that new strains of the virus are emerging, even with vaccines being launched by companies like Pfizer PFE,
+ 1.91%
and partner BioNTech BNTX,

and Modern MRNA,
+ 3.54%.

Earlier this month, Ed Yardeni of Yardeni Research said that he anticipated a strong December performance promoted by investors and fund managers, changing some of his winners from the pandemic period to value-oriented actions that have not yet enjoyed the fruits of a growing economy. improvement.

December gains also followed a sharp rise in November, which MarketWatch’s William Watts said he was unlikely to “steal” December earnings.

Detrick said the effect of Santa Claus’ rise could shape trade the following year.

The analyst said that, going back to the mid-1990s, “there were only six times that Santa Claus didn’t show up in December” and in those cases, January also dropped five times less, and the entire year had only a solid gain once – in 2016, but a mini-bear market earlier that year.

“Considering the 2000 and 2008 bear markets, both came after one of the rare cases in which Santa Claus failed to make us believers. If this seasonally strong period misses the mark, it could be a warning sign, ”wrote Detrick.

Source: LPL Financial

That said, Mark Hulbert of MarketWatch argues that a failed Santa Claus rally does not always portend poor performance, although market researcher Yale Hirsch, creator of Stock Trader’s Almanac, noted: “If Santa Claus doesn’t call, they can see bears for Broad and Wall ”, referring to the intersection between Wall Street and Broad Street, where the New York Stock Exchange is located.

Analyzing the correlation between the performance of the Dow Jones in the second half of December and its return for the following year and obtaining interest: The stock market on average Best after the losses of late December and nothing worse.

Hulbert warns readers against extrapolating much of his findings and notes that 2021 may differ from other years and seasonal trends, due to the global pandemic and its impact on economies.