Thursday, December 18, 2008

Yes, Virginia, there is a Santa Claus Rally

As a Christmas gift to my faithful readers, I was looking forward to doing a blog on the Santa Claus rally to see if there really was one. In case you don't know what that is, the Santa Claus rally is typified by a surge in stocks that occurs in before Christmas to just after New Year's. Explanations for this phenomenon include holiday-induced optimism, people investing their year-end bonuses, gift money, and the fact that the kill-joy Wall Street pros are off skiing in Aspen.

So, is this a real rally? According to a web article published last year by the CXO Advisory Service, results of data collected for the day before Christmas to six trading days after Christmas showed little evidence for a Santa Claus rally; however, their data seemed to suggest abnormal strength just before Christmas as well as for a day or two after the New Year. I wanted to see for myself if their assertions were true so I went back and examined the chart of the S&P 500 for the days before Christmas as well as the days after New Year's. Here's what I discovered.

The days before Christmas
The last trading day before Christmas closed up four times, with three of the four days occurring in 1998, 1999, and 2000. (The other up day was 2007.) It closed down three times but only slightly and the other three times were essentially flat. Not very exciting news. However, in nine of the past ten years, the market did go up just before the last trading day, which is statistically significant. My data show that the market rose for the preceding two days three times and the preceding three days twice. The other four times it went up for periods lasting up to seven days. [One way to play this would be put on bullish strategies (buy the SPY or index call options) two to three days in advance of the holiday (like next Monday) if the market opens up.]

The days after New Year's
I looked at the first trading day after New Year's for the past ten years and found that there were six down days ranging from -0.1% to -2.8% (in 2001), three up days ranging from 0.6% to 3.3% (in 2003), and one day that was essentially flat (1999). The days following the first trading day of the New Year were evenly split with five up periods and five down periods. These data are not statistically significant.

Conclusion
We can conclude that a pre-Christmas rally seems to be more than just a coincidence but there is no evidence from ten-year data to support a New Year's rally.

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