Many advisors predicting a “Santa rally” for US stocks are running out of patience. That’s because the only seasonal force at the end of the year worthy of being called a Santa Claus rally doesn’t start until after Christmas. The period from Thanksgiving to Christmas itself presents no statistically significant probability of rising.
Admittedly, none of the consultants planning the post-Thanksgiving Santa’s gathering have bothered to say exactly when it’s supposed to start and end. So disproving that is difficult. To do this, I measured the Dow Jones Industrial Average of the Dow Jones Industrial Average,
Thanksgiving gains are at their highest close in December. Although it takes perfect clairvoyance to achieve this gain, it is the theoretical maximum for such a height.
Since 1896, when Dow Jones was created, its average profit measured in this way has been 3.35%. This may sound impressive—equivalent to over 1,100 Dao points at the moment—but it really isn’t. When the rising potential of other months is measured in the same way, many of them exceed those of the post-Thanksgiving period.
This is shown in the table below. To create it, I averaged the height for each month from the fourth Thursday (the equivalent of Thanksgiving) to the following month’s peak. As you can see, seven more months have a higher probability of eruption than the period beginning after Thanksgiving.
In fact, the probability of a rally after Thanksgiving (shown by the November bar) is lower than the average of 3.75% over the other 11 calendar months. In other words, the period several weeks after Thanksgiving is actually a period below average for the stock market.
Investor holiday spirit
Don’t lose all hope. A period of several days beginning after Christmas shows abnormal strength. According to the Stock Traders Almanac, the true Santa Claus rally period lasts from the first trading session after Christmas and continues until the second trading session of the new year. During this period, the Dow Jones rose 77% since the index’s inception in 1896 and produced an average gain of 1.5%. Over all other equal periods over the past 126 years, the Dow rose 56% of the time and produced an average gain of just 0.2%. These differences are statistically significant.
It’s also heartening to see that this trend has been getting stronger for years, like this year, as the stock market lost steam from the start of the year until Christmas. Averaged over all these years since 1896, from Christmas to the second day of January, the Dow rose 2.2%. That compares to an average gain of 1.2% in years when the stock market posted annual gains over Christmas.
So please don’t take Santa’s good name in vain. He already has enough on his hands without taking responsibility for the stock market’s performance before Christmas. History suggests that the Santa Claus rally won’t arrive until Christmas, and so will the big man himself.
Mark Hulbert is a regular contributor to GameSpot. His Hulbert Ratings tracks investment news releases that pay a flat fee to be audited. It can be accessed at mark@hulbertratings.com
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