Will a Christmas Rally or Santa Claus Rally turn around the current market slump?

Team Veye | 26-Nov-2018 market slump

The Christmas fever is gripping and you can hear:  

“It's the most wonderful time of the year
With the kids jingle belling
And everyone telling you be of good cheer
It's the most wonderful time of the year”

It is that time when the Christmas decorations are all around and share market investors begin to wonder about the prospects for “Christmas rally”. For those of you who are new to the market and not well versed with the term, a Santa Claus or a Christmas rally describes sustained increases in the stock market that occur in the last week of December through the first two trading days in January.  Although like most share market cliché it sometimes rewards investors with a sack full of goodies but at times it may also leave them unhappy, if the period ends into a bear market. There are numerous explanations for the causes of a Santa Claus rally.  Some claim it as a psychological phenomenon, with people feeling good towards the end of the year. While others believe because day traders go on holidays during this period or an anticipation of the January effect causes global stocks rally to start the year after US tax loss selling is out of the way. There is also a theory that there is a rush of cash from Wall Street bankers investing their bonuses before the holiday break. 

But, in recent years the Santa Claus Rally seems to be losing some of its power. Historically, there has been a Santa Claus rally in 35 of the past 46 Christmas seasons. As per an analysis, 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. Research going all the way back to 1896 has also shown an average 1.7% gain during this seven day trading period, with positive results 77% of the time.

So, will the markets witness a rally this year? Well, some experts are of the opinion that the markets coming down to a 23-month low is another reason to look out for 

the Santa Claus rally because in years where it doesn’t turn up the rest of the year, it works well during this period. But sometimes it can be terrible. The best recent examples are the 4% decline during the Christmas rally period of 1999, which ushered in a 33% retreat in the ensuing bear market and the decline at the end of 2007 which also ushered in a nasty bear market. 

Some investors believe that one thing that might be operating in favour of a positive Christmas rally this year has been the healthy correction that has been passing through the Australian and other Asian, European and US markets for the last few weeks. Although there have been many triggers for the market weakness recently but most analysts also see the correction as a healthy period of consolidation which has been widespread across most major markets, particularly as the US dollar strengthened against many currencies. 

So, will the Christmas rally be spread across the entire stock market?
Which sector will witness a boom?
Which stocks should you buy?
Looking at the current market trends, is it really worth taking the risk?
Will Santa Claus really send your gifts wrapped in the form of your capital growth in the stock market? 

Well, Veye analysts believe that trading in the period after Christmas is not recommended. There is little upside and, as of 2017, the market fell in the two of the three prior years. Moreover, if there is no rally, that can be a sign of a bear market in the future. In the final weeks of 1999 and 2007, stock prices rose rapidly but only to be followed by bear markets. A better strategy is to maintain a long-term investment strategy and not be tempted by the promise of Santa Claus rallies or January effects.


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