The Santa Claus Effect - What You Can Expect

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The theories about why it happens may vary, and, as with other seasonal events, there is no guarantee the rally will materialize. The week leading up to the Christmas holiday is bullish more often than bearish according to history. But the number of positive growth years depends on how far back in time you look at the data. Some data has discovered the S&P 500 offers a 65% chance you’ll see positive returns the week ahead of Christmas. Keep in mind, however, the other 35% of the time, when the market incurs losses ahead of the holiday, losses end up being greater than the gains by nearly 2 to 1. Over a 20-year period, the index gains have averaged just over 1.5%, but losses exceed 3% during bearish periods. Also, the Santa Claus rally time frame is debatable – some consider the week before Christmas, while others include the week following in their analysis. My Scanner Illustrates the Potential for Holiday Gains Using my Toms Option Tools app, I ran a scan that looked back nearly 20 years, which included the week ahead of Christmas and the week following. When I combined the two-week period, you’ll be pleasantly surprised about the results. By using my tools, I found that the SPY had positive returns 84% of the time, but the gains averaged only 1.22%. So, while there are good odds for bullish behavior the week before and after the Christmas holiday, the gains are certainly modest. Now, let’s think about the strain the market has been under this week. Between December 13 to 19 the SPY lost close to 8% of its value – creating “oversold” market conditions. Although volumes were quite heavy on some of the sell-off days, this type of selloff leads to “bargain shopping. Historically, when the general market loses 10% of its value it has “corrected” in the minds of some, and you can often count on a bullish bounce after such strong selling. It didn’t help that economic concerns are prevalent, so as the market fell this past week, bearish momentum is building. Why We May Be Disappointed I mentioned above that my scan found 84% odds the market will rise the week before and after Christmas, but that also means there is 16% odds we’ll have negative returns. We may very well see a market pop over the next week or so, but just keep in mind that it’s much harder to realize positive gains once the market falls sharply as it has just prior to the Santa Claus rally commencement. Whether you look to the odds and decide on taking a trade or not, the last couple of weeks of the year can be used to reflect on the good and poor trading choices we’ve made throughout the past year. I’ll plan on taking some time off next week for that very reason – to reflect, and then to prepare for the coming year. I hope you’ll do the same. 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