Is It A Thing?
Popular stock market wisdom is that there is a ‘Santa Rally’ at the end of the year. As with all stock market sayings it’s a good idea to check out whether it really exists or not by looking at the actual data rather than rely on someone’s idea of what the data says.
Technically, the Santa Rally happens in the last 5 trading days of the year plus the first 2 trading days of the new year. So, checking back over the last 20 years, here are the results:
- 16 of the years had an increase, averaging 1.59%
- 4 of the years had a decrease, averaging 2.25%
It seems that the Santa Rally happens more often than not, but you can see that it is not hugely significant compared with the wild swings we have recently, with SPY moving more than that in a single day. The results are skewed by one massive result at the end of 2008 when the Santa Rally produced an upswing of 7.76%. If we take that out, then the average increase is only 1.17%.
Why is there a Santa Rally?
The most common explanations are:
- Lighter volumes as it is the holiday season so it is easier to move the market.
- The tax-loss harvesting at the start of December is over.
- Short sellers and bearish traders tend to avoid carrying positions over the holidays.
- Increased investor purchases waiting for the January Effect.
The January Effect? Is that a thing? We’ll have a look in the next ITM Update.
ITM - Where Are We Now?
The last month has been a rollercoaster, and we are now back to where we were on the 1st November. It is easy to get caught up in the hysteria around the market. The news that the S&P 500 has dropped over 2.5% certainly doesn’t improve your day, but we have to keep things in perspective: we are nowhere near our exit signal (the 10/200 death cross). As at today’s prices, SPY would have to drop to around $434 for this to happen, and it closed on Friday at $459.87.
If we look at the chart for all 2021, then we see that SPY has bounced off the 50 day SMA 6 times already this year. Will this be the 7th? Or are we heading into more pain?
I don’t know. Nobody does. We just have to keep a cool head, watch what is happening and when we see our objective signal then we get onto the sidelines and watch from there.
Merry Christmas! Happy New Year!
This is last ITM update for the year. I always think that the start of a new year is a good time to reflect on the past year and plan for the next one. For me, this has been a big year, so many things have happened and I am full of anticipation for everything that is going to happen next year.
I would like to thank readers for all the lovely emails and comments they have sent, I have read every one of them and I really appreciate your taking the time to do it.
I wish everyone a Merry Christmas and a wonderfully happy and prosperous New Year.
See you in 2022!
