The Santa Claus Rally
“If Santa Claus should fail to call, the bears may come to Broad and Wall.”
This quote is a reference to the often cited and very misunderstood “Santa Claus Rally” (SCR) window. Many investors pay attention to seasonality. The tendency for markets to behave a certain way based on the calendar. There are many well known seasonal factors that play out in the market. “Sell in May and go away” is a reference to the fact that the six-month period from May through October tends to be weaker than the six-month period from November through April. The “January Effect” refers to a historic tendency for small stocks to outperform large stocks in January. There was a period of time when you could buy Calloway Golf (ELY) in February and March and have a good chance of making money in anticipation of the golf season opening up for much of the country. I put very little weight into this form analysis. If I had to rank where seasonality falls on my list of tools, it could be very close to bottom.
There are some markets where seasonality makes more sense. If you are buying and selling agricultural commodities like wheat, corn, soybeans, etc… you can see how the weather and the seasons in the different growing regions may have an impact on prices. But in the equity market, I just don’t get it. Maybe I am missing something so if I have some time in the weeks ahead, I may look into it further and run some tests.
So why am I writing about “Santa” if I am not a believer. Well, first, I missed my chance to go shopping over the weekend, which actually puts me in the holiday spirit. Second, because I am going to be asked about it more than once in the next few weeks so I like to at least be up to speed. Finally, it is one of the most misused data points in investing. Many think that the SCR window opens in December but that is wrong.
So, what is it? A Santa Claus rally is a seasonal phenomenon, according to "The Stock Trader’s Almanac," a longtime provider of analysis of both cyclical and seasonal market tendencies. According to the Almanac, "...since 1969, the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons – the last five trading days of the year and the first two trading days after New Year's. The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average." The Almanac is actually a fun book to read. I used to sit next to someone who would get it as a gift from one of his clients every year. If you know someone who is a market junkie, you can get a last minute gift here.
So this is a window that is only seven days long, not a whole month. The question is, how can you use it. I guess you can by a broad-based index fund right before the close on Christmas Eve and hold until the close on the second trading day of January. But more likely, if you are a long-term investor, it does not make sense to deviate from a sound plan or strategy (I touched on what deviating from a process can do yesterday). There are some who believe that the lack of a SCR will lead to bad performance the following year…I am skeptical. I think Investopedia sums it up nicely: None of this is useful for most investors who do not have the trading experience to manage risk in such short time frames. For buy-and-hold investors and those saving for retirement in 401(k) plans, for example, the Santa Claus rally does little to either help or hurt them over the long term. It is an interesting news headline happening on the periphery, but not a reason to become either more bullish or bearish.
Honestly, to me the SCR is one of those things that a lot of people have heard of. It normally makes for something to fun to talk about at holiday gatherings. But since we can’t gather this year, I will have to talk about it here. And, as I said, I will get asked about it, so I like to at least be able to comment. This note helped me get my thoughts straight.
As for the market, I am and have been bullish. Should I become more bullish for this seven day window? Probably not. If we don’t get an SCR, should I turn into a bear for 2021? Probably not. If the trend is up, I am bullish. If the trend is down, I am bearish. If the trend is flat, Neutral. Right now the trend is up. If the S&P 500 moves below 3,200, the trend will be down. If the index is between 3,400 and 3,200, I will be neutral. I update my thoughts everyday for clients.
What was interesting yesterday?
The Fed held their December meeting, they didn’t make any material changes to their policy on rates. Some thought that they may boost buying of long-term bonds but that did not play out. They did, however raise their growth forecasts for the next two years while lowering their unemployment forecast. So better growth, lower unemployment but keeping rates low.
Retail Sales for November fell 1.1% while estimates were for an increase. Restaurants and department stores made up the bulk of the decline which makes sense given the rise in COVID cases.
There were Multiple reports highlighting comments from Democratic and Republican leadership about the prospects for a fifth coronavirus relief bill following meetings on Tuesday night.
According to the latest Merrill Lynch Fund Managers Survey, everyone is still very bullish on the equity market. Cash levels declined to 4% which is a level that the firm believes increases risk in the market.
Bitcoin broke above $20,000 for the first time. More on that tomorrow.
Please consider sharing this note with anyone who you think may find it interesting.
*Nothing in these pages should be considered investment advice.