10 December, 2018
Get the milk and cookies ready, because Santa is on his way to Wall Street! Yes, investors believe in the jolly guy, and wait for him to ‘roll his rally in’, every year! Sounds unreasonable?
Well, it may come as a shock, but markets are superstitious. Almost any experienced trader is familiar with concepts such as: The ‘Witching Hour’ from 2 to 3 PM. Or new moon – good; full moon – market disaster.
And what about the Super Bowl Theory? Passing judgement on stock markets’ performance based on this year’s Super Bowl outcome… Needless to say, none of these have statistical evidence to back them, and so are hardly wise trading indicators. But how about Santa?
The Santa Claus Rally, also known as the December effect, is the seasonal tendency of stock prices to rise from end of December to beginning of January. A pattern first noted in the 1972 “Stock Trader’s Almanac” by Yale Hirsch, truly yielded positive returns on approximately 75% of times since 1969.
So what’s up with that? Some potential reasons are:
As traders anticipate an increase in stock prices during the month of January, some prefer to make their move in advance.
With ‘Tax-loss selling’, investors choose to sell losing stocks nearing year end, to lower their taxes on net capital gains. They then put their money back out there, which causes stocks to surge.
In desire to make their portfolios look more consistent and reliable, mutual fund managers sell off poor-performing stocks near the end of a period to appeal to investors. Typically, this only works for those less savvy, since an experienced investor knows to evaluate a portfolio over the long-term.
As superficial as it seems, the ‘New Year fever’ isn’t going anywhere. The joyful holiday season and the perspective of a fresh start causes sentiment even in the financial markets! As investors hope for a new beginning, and thrive in their optimism, they tend to become more bullish on stocks.
And what about this year? With everything that’s been going on, we want to know if Santa is coming down the chimney, or we shouldn’t hang our stockings, just yet?
The answer is threefold! Brian Belski – BMO Capital Markets Chief Investment Strategist, is positive that the effect is likely to take place, as it almost always does. Several others, among which Richard Hunter, Head of Markets at Interactive Investor UK, and a frequent commentator for BBC, CNBC and Bloomberg, agrees with him.
Hunter points out that taking into account the FTSE 100 index, starting all the way from 1998, one can see the “Santa Rally” took place every single year, with no exceptions!
Others, however, say we shouldn’t count on it this time around. And even Hunter himself appears to be skeptical about 2018. Although the past may speak for itself, this year is a different story. Lindsey Bell, an investment strategist at CFRA Research, thinks that the rally entirely depends on the trade war situation between U.S. and China.
If Donald Trump does come through with a trading truce, Santa has a chance of making it. If not... It’s hard to say. The dispute between the two titans is the single most concerning issue for the markets. If there are no signs of peace, stocks are likely to sell.
Of course there are also those who consider the “Santa Claus Rally” an overall superstition! Mark Hulbert, a known financial analyst, finds that the ‘rally’ is nowhere near an unusual market behaviour.
On the other hand, every market is different. Depending on where you stand, you may discover controversial results. This is why we always advise traders to go for both Technical and Fundamental analysis, as well as apply strict risk management practices in their trading decisions.
*Risk Warning: CFDs are complex instruments that come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts, lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
One of the most exciting parts of this ever-changing market is deciding what you're going to trade with next. This article is part of a series, on the importance of repetitive events in your trading path.
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