There are many adages in trading and at this time of year we always see references to the Santa Claus Rally. From a statistics standpoint, the market has risen in the last few weeks of December more that it has declined. Truth be told, it has only risen slightly more often than it has declined (about 60% of the time) when you look at a longer number of years.
There have been periods where it happened more regularly in consecutive years which is all it takes for a myth to take hold.
The other reason this seems to keep coming up every year is that the various suspected causes are just plausible enough for people to buy into it.
- Holiday bonuses allow people to invest. (seems a bit optimistic that people wouldn’t blow that money on gifts and that it would be enough to move the market needle at all)
- Institutional traders are going on vacation and more enthusiastic retail traders are pushing things up. (if you spot an institutional trader ask them how their 3 week vacation is going. Next…)
- People are setting up trades as the end of the year approaches for tax strategies and to simply round out end of year numbers. (this one seems the most believable but I can’t quite tie the selling losses for tax purposes to a spike in the markets.)
From what I have researched I have come to two conclusions.
As I mentioned if you look at a more recent time frame (from 1999-2020) the rally has played out in 13 of those 20 years. That is just enough to keep people buying into the mojo. And, as you can see in the chart above, the recent Omicron pullback will go a long way to perpetuating this Kringle cash cow.
But times are changing and I think there may be other new factors at play. With the torrent of information being pounded at us there is a motivation for those generating information to look for things that will catch our attention. I don’t have the resources to count how many times “Santa Claus Rally” appeared in the media but I am going to guess that it has increased significantly. (yes I realize the irony that I am contributing to that number).
As this pops up more and more, the human tendency to look for an easy win helps this myth snowball and it becomes a bit of a self fulfilling prophecy. More people believe it, more people buy into the last three weeks of the year.
My take away from this is consider these myths and why people pay attention to them when you trade. Then, go back to logic and proven methods to verify your trades. If you are happy with a 6 out of 10 chance for a gain, you should really grab Don Fishback’s Quick-Start Guide to Options Success. Don’s ODDS method uses probability to find the best possible trades and he looks for trade with WAY better chances of success than Santa.
Keep learning and trade wisely,
Market Wealth Daily
PS-Wendy Kirkland is going to be walking through two of her most popular, and successful, trading approaches next Wednesday in an Investment Corner interview. If you have ever wanted to see how they work and hear your questions answered, this is your chance. Sign up here.