The Santa Claus Rally is the name given to a seven-trading day period that includes the last 5 of the year and the first two in January. For 2012, it began on Monday December 24th and ended on Thursday January 3rd. It wasn’t looking so hot at first with S&Ps down 30 handles from the close on Friday Dec 21st. But Saint Nick certainly showed up in time to lock in a 2% profit and solidify another Santa Claus Rally for the record books.
So what exactly does this mean? Well, during this period the S&P500 will post an average gain of 1.6%. But as the saying goes, “If Santa should fail to call, bears may come to Broad & Wall”. Meaning that when stocks don’t rally (and Santa fails to show), it typically precedes a bear market or at the very least a time when stocks can be purchased at lower prices later in the year. We ran the numbers going back to 1969, and indeed the data does show below average returns, as well as a lower batting average on years where Santa was too lazy to go to work.
But as it turns out, we did have a Santa Claus Rally. So what does it tell us?
Well, the S&P500 has returned an average of 8.8% on Rally years since 1969, compared to just 5.4% on non-rally years. The short-term is better also: January is up an average of 1.5%, while non-santa rally Januarys are flat. First quarters are up an average of 3.4% following a Santa rally, compared to a -1.0% return. And the biggest difference probably has to be the first half stats that show a 5.6% return for the S&P500 through June compared to just 0.6% when there hasn’t been a Santa rally.
I suppose its not a bad thing going forward that stocks rallied. But I’m not sure how much weight we can give this one data point. I’m definitely a much bigger fan of the January Barometer, which takes data for the entire month of January. The statistics regarding both the forecasting ability as well as the warning signs are phenomenal. I mentioned it in my What Does January Mean To You post last week. So let’s see how we close out the month before we start jumping to conclusions about the rest of the year’s results.
We take seasonality very seriously. But at the end of the day, it’s only price that counts right? This kind of stuff offers clues about where prices may be headed. Momentum and sentiment readings are two more examples of such clues. So let’s take this for what it is, just one piece of the big puzzle that we call the market.
A check mark for the bulls? Sure. A sign to go buy stocks blindly without a net? Not a shot.