Technical Analysis is the study of the behavior of the market, and therefore market participants.
We’re analyzing how humans behave.
That’s the edge that a good technician has over other types of investors.
Conditions change. Market environments go through different cycles. But the humans act in similar ways.
I’ve been at this professionally for over 2 decades. I’ve interviewed hundreds of traders and investors over the years. I’ve been interviewed hundreds of times, maybe even thousands.
I’ve given stock market presentations in 30-40 cities all over the world, including Europe and Asia. These guys in Mumbai or in Tokyo, or Boston may have grown up very different than I did (Cuban kid in Miami), but they all think and act exactly the same when it comes to money, fear and greed.
The company I founded in 2016 was acquired in early 2022 for a life changing sum of money.
You might think a little differently when something like that happens to you, but a lot of the behaviors remain the same.
Throughout all these experiences I can promise you that I’ve learned a lot.
I pay attention.
And today I want to share something really important that I’ve picked up on. Humans behave differently during different times of the year.
We dress differently, we hang out with different people and we go to different types of places.
If you think that those changes in behavior patterns don’t impact the decisions we make with our money in the market, then you must not know humans.
And we study those behavior patterns over time.
I encourage you to do the same. (See: Stock Trader’s Almanac)
You’ll notice a very common trend of stocks doing well to start the year, dip a bit in February and then rally into the Spring. Historically you then get the summer doldrums after that, with messy markets and low liquidity, followed by the September and October volatility and weaker stock performance. Then stocks tend to finish the year strong in November and December preparing for that typical strong January to start the new year.
That’s the cycle.
And just because stocks are supposed to do well into the end of the year, doesn’t mean we’re just going to blindly buy stocks.
It’s actually the exact opposite. We don’t put too much weight ahead of seasonal trends. It’s way more important AFTER the fact.
In other words, did stocks do well during a time they were supposed to act well?
Did stocks have a hard time during a period where they were supposed to struggle?
If the answers are YES, then there’s nothing to talk about.
Again, unless you’ve studied history, you don’t know that. If you just watch television on basic cable or listen to the angry man on the twitter, then you probably think seasonality is best approached through positioning in anticipation of strength or weakness.
That mentality is for fools.
But for those who have taken the time to actually do the work, you’ll quickly notice that the real signal is whenever the market ignores seasonal tendencies.
If stocks do well during a time they are supposed to struggle, THAT is the bullish signal.
When stocks act poorly during a time they are supposed to do well, THAT is the bearish signal.
The same goes with the Santa Claus Rally.
This period consists of the last 5 days of the year and the first 2 of the following year. Depending on when the holidays fall and the days of the week, the exact dates change every year.
For 2023, the 7-day Santa Claus Rally period begins on Friday December 22nd and goes through Wednesday January 3rd.
Again, if stocks rally during this period, then there’s nothing to talk about. Stocks historically do well during this period. Hence the name: Santa Claus “Rally”.
It’s when Santa doesn’t show that we want to get more interested.
As the saying goes, “If Santa Claus should fail to call, bears may come to Broad and Wall”.
For those of you who aren’t New Yorkers, the NYSE is located downtown on the corner of Broad St. and Wall St.
A good example was in late 1999, stocks fell 4% during this period, preceding the epic dot com bubble collapse a couple months later.
We also saw stocks struggle at the end of 2007 during this bullish time, and that preceded the Great Financial Crisis.
Again, I encourage you to go back and study these periods. There’s good information there.
So to be clear, no the Santa Claus Rally period does not start after Halloween. It does not start after Thanksgiving.
In 2023, the Santa Claus Rally period begins on December 22nd.
Anyone who tells you otherwise is either lying to you or very confused. They are not to be trusted.
The Santa Claus Rally is not a good reason to buy stocks. It’s not a reason to sell stocks, but entering a seasonally strong time is hardly a reason to put new money to work blindly.
The real signal is after the fact.
Did Santa show up or not?
That’s what I want to know.
[Also note: The January Barometer and the January Effect have nothing to do with any of this. These are blog posts for another day.]
Humans are a funny bunch. The more you pay attention to their behavior, the better you can understand your own behavior.
Pro tip: You’ll see a lot of similarities.
We’re all human.
We act in predictable patterns.
When we don’t act that way, something is up.
Earlier this year stocks did well during a time they were supposed to do well. Santa showed up ahead of the best first 6 months to a year in the history of the Nasdaq. All perfectly normal.
Then in Q3 this year, stocks struggled to get going, just like seasonal trends have told us for many decades. Standard stuff.
And now stocks are supposed to do well in the final 2 months of the year.
So far they have.
There’s nothing to see here.
Move right along.
Come talk to me if Santa doesn’t show.