Another Santa Claus Rally is officially in the books.
This year the S&P500 rallied 0.80% during the period, which is more than 3 times the historical returns for all the other 7 day periods throughout the year.
You can learn more about the SCR in this note from last month.
OK so great, Santa showed up. So what?
Well, stocks rallying during this period is not the bigger deal here. It’s actually just perfectly normal market behavior.
If anything it’s more of a relief because historically if Santa doesn’t show, and the S&P500 does NOT rally during this period, it normally precedes new bear markets, continuations of old bear markets, recessions and all sorts of things most investors probably don’t want to see.
For example, Santa didn’t show up heading into 2000 or 2008. And we know how those turned out….
So Santa showed. No big deal. There is no “additional” reason to be concerned about the market. We can move on.
The next important signal we get now is the “First 5 Days” of the year. The last 47 Up First Five Days were followed by full-year gains on 39 of those occasions. That’s an 83% hit rate. The average return is up near 14% for those years as well.
The numbers fall off dramatically when the First 5 Days are down, coming in negative about half the time and averaging less than 1% returns for the year.
So now that Santa is behind us, the First 5 Days are next.
After that comes the January Barometer to complete the Seasonal Trifecta. But we don’t get that data until the end of the month.
“As January goes so goes the rest of the year”, is what we like to say around here. That’s how I learned it from the Hirsch family. Make sure you get this year’s copy of the Stock Trader’s Almanac.
But we’ll discuss that January Barometer in February once we have all the data.
In the meantime, we’ll keep an eye on how S&Ps kick off the new year.
Also, one thing I’d like to make sure we’re clear about is that Seasonality plays a very small role in our every day decision making. We use seasonal trends like we do sentiment, to help put things into context. NOT for timing purposes.
Price is the only thing that pays. Yes, we weigh all the evidence. BUT, if a stock is going down, we’re not just going to stay in it because Santa showed up lol.
Also, we’re not just going to short everything blindly because the first 5 days of the year are down.
We want to put things into context. We want to understand whether or not we have the wind at our backs. Which way are the odds leaning?
That’s how we use it.
We went over our favorite strategies to take advantage of the current environment on this week’s LIVE Video Conference Call.