‘Santa’s rally starts Thursday? Why few stretches are better for stocks

Santa may not be coming to town because of the pandemic, but he is coming for a socially distant visit to Wall Street stock traders if the story is a guide.

Stocks have performed extremely well over a seasonal period, including the last five trading days of the year and the first two sessions of the new year, in what will come to be known as the “Santa Claus” rally.

The period starting Thursday this year is considered one of the best seven-day stretches for equities at any time during a year and boasts an average return of 1.3%, the second-best result among a seven -day period for one year. The spread has also ended positively in nearly 78% of about 250 trading sessions, according to Ryan Detrick, chief marketing strategist for LPL Financial, in a Wednesday research note (table below).

Source: LPL Financial

Detrick says it’s not exactly clear why this December stretch historically turns out to be such a good period on average, but some speculate that institutions are squaring their books by the end of the year, with consumer holiday increases increasing corporate sales, thin trading volumes with Many investors on vacation and optimism over the coming year could all be factors in the bullishness that is spreading across the financial markets.

“The bottom line is that bulls tend to believe in Santa Claus,” he writes.

It can be hard to trust that stocks will muster another winning streak after a huge rebound from the low crashes seen in March when the coronavirus pandemic hit and another rally to this point in December.

Dow Jones Industrial Average DJIA,
+ 0.38%
has already increased by approx. 2% so far this month, the S&P 500 index SPX,
+ 0.07%
has increased by 2.4% during the period, and the Nasdaq Composite Index COMP,
has so far risen 5.2% in December.

Detrick said there is reason to believe there is another leg on the rally because Decembers tends to get off to a relatively slow start and gain steam at the end of the calendar year.

Source: LPL Financial

Investors are concerned about the market’s ability to sustain the almost undiminished rise in records and high valuations amid a resurgence of the COVID-19 pandemic in parts of the world and signs that new strains of the virus are growing even when vaccines are rolled out of similar Pfizer PFE,
+ 1.91%
and partner BioNTech BNTX,

and Modern MRNA,
+ 3.54%.

Earlier this month, Yardeni Research’s Ed Yardeni said he expected a strong performance in December, promoted by investors and fund managers turning out some of their winners during the pandemic period and into value-oriented stocks that have not yet borne fruit. An improved economy.

Winnings in December also follow a strong run in November, as MarketWatch’s William Watts said it was unlikely to “steal” from winnings in December.

Detrick said the impact of the Santa Rally could shape trade the following year.

The analyst said that “back to the mid-1990s,” there were only six times Santa did not appear in December “, and in these cases January also brought a pull lower five times, and the whole year had only a solid gain a time – in 2016, but a mini-carrier market early in the year.

“Given the bear markets in 2000 and 2008, both took place after one of the rare cases that Santa Claus did not show makes believers out of us. Should this seasonal period miss the mark, it could be a warning sign, ”Detrick wrote.

Source: LPL Financial

That said, MarkWatch’s Mark Hulbert makes the case that a failed Santa rally does not always require poor performance, although market researcher Yale Hirsch, creator of the Stock Trader’s Almanac, has noted: “If Santa doesn’t call, bears can come Broad and Wall, ”referring to the intersection of Wall Street and Broad Street, where the New York Stock Exchange is located.

Analyzes of the correlation between the Dow’s performance in the second half of December and the return for the following year and made an interest result: The stock market does on average better after losses in late December and not worse.

Hulbert warns readers against extrapolating too much from his findings, noting that 2021 may differ from other years and seasonal trends given the global pandemic and its impact on economies.