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Santa Claus Rally
"Santa Claus Rally" is a well-known phenomenon, first discovered by Yale
Hirsch and published in his Stock Trader's Almanac. During this year-end rally, stocks tend to advance, sometimes
sharply, from the day after Christmas to the first two days after New Year's
Day.
But now, just as the retailers have extended the
Christmas shopping season to Halloween, the Santa Claus Rally has been extended
by traders to cover the final two to three months of the year.
- Is the Santa Claus Rally
real? Can it be confirmed historically?
- What is the cause of this
year-end stock rally?
Stocks Tend to Rally at Year's End
The Santa Claus Rally is historically factual. In terms
of the original Santa Claus Rally, 65% of the time (going back 100 years),
stocks have advanced during the week following Christmas Day, and have done
better than December as a whole.
In the past ten years, November and December have been
extremely bullish. Even during the bear markets, 2000-2003, stocks rallied in
the final two months. See the chart below of the Dow Jones Industrial Average,
and notice the steep run-ups just before the annual vertical lines.
Year-End Money Flow Boosts Stocks
Analysts suggest several factors that drive the Santa
Claus Rally:
- The end of tax-loss
selling.
- A tendency for investors
to fund IRAs and 401(k)s at the start of a new year.
- Financial institutions
and mutual funds seeking to be fully invested for the New Year.
- Upbeat year-end stock
forecasts for a good January (the January Effect).
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