Special Report – The Santa Claus Rally Phenomenon
SPECIAL Report – The Santa Claus Rally phenomenon (26-11-2018)
It’s that time of year once more where we find out if we have been good boys and girls and if Santa Claus is on his way. There are seasonal patterns in the markets and one of the strongest and most consistent has occurred at the end of the year and early into the New Year. This is often referred to as the Santa Claus Rally or the Christmas Rally. One of the potential reasons for this phenomenon is the basis of the American tax year which runs the same as the calendar year (from the 1st of January to the 31st of December). This is generally a strongly Bullish time of year for the US markets and as a consequence it’s also a strongly Bullish time of the year for the local Australian market. There are a lot of investment decisions based around the tax year by institutions, fund managers and the public at large leading into this time of year. On top of this people like to make New Year resolutions and some of them will be based around what they would like to achieve from the market. Regardless of the reason why, it’s a phenomenon we need to look at in order to take advantage of ourselves. It makes sense to focus on higher probability trades or investments and this provides an edge we can utilise.
For me, I am looking for a pattern which repeats often enough that will provide me an edge. If we have a good idea where the market may be headed then we can wait till it sets up in such a way to allow us to jump on board. Then we manage the trade no differently as any other, focusing on your risk and money management. This being said, we only have reliable daily data from 1980, which means we only have a sample period of 38 years to work with.
In the charts below I have taken snapshots of each year for the period starting at the beginning of October through till mid-January to see if there is anything to this Santa Claus rally or not. You will be able to make up your own mind if there is a regular consistent seasonal pattern or not. To make the determination of this a little easier I have identified the main direction of the market over this time with a coloured box - Green for Bullish, Red for Bearish and Blue for sideways. The other thing I should point out is that pre 2000 I have used the All Ordinaries (XAO) for my data as the ASX S&P 200 (XJO) has only been around since 2000.
Looking at the 38 years in question, we have 2 years which went sideways (1987 & 2008), another 4 years which went down (1981, 1990, 2007 & 2011), while the other 32 years went up. This provides us with an 84.2% chance that 2018 will see the market move up over this time from now till the first week of January. This is what I would like to call an edge. Before we get too excited and bet the farm that the market is on a one way trip to the moon, there is still a 15.8% chance that we could be flat or down. An 84.2% chance of the Santa Claus rally happening is a promising start, but we really need to dig a little deeper to get a better understanding of the structure of this phenomenon. When does it start, when does it end, how long does it normally run for and by how much does it move?
Australian Market (XAO & XJO) Daily Line Charts – (1980 – 2015)
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