The Santa Claus rally is a stock phenomenon that happens when the stock market rallies at the end of the year. It's different from an stock market indicator, which attempts to predict what the future year will do.
Most Santa Claus rallies occur during the last week of the year – between Christmas and New Years.
The last major Santa Claus rally occurred in 2011, when the S&P gained over 50 points in the last 10 days of the year:
So, do you think that we could still have a Santa Claus rally this year?
The Case For a Santa Claus Rally in 2013
While December has gotten off to a bad start, there are still a lot of signs pointing towards a possible Santa Claus rally this year.
First, the employment numbers released last week were great. The economy added over 200,000 jobs and the unemployment rate dropped to 7% – the lowest since the last Santa Claus rally.
Two, auto sales have been booming lately as well. This means consumers are spending on bigger items, which will boost earnings in companies across the economy. This should boost the stock market in the coming weeks.
Finally, December has traditionally been the best performing month in the stock market, going all the way back to 1950. If you look at historical trends, the market typically rallies November, December, and January. Given the results in November, you could argue we're right where the market should be in this 3 month rally.
The Case Against a Santa Claus Rally in 2013
However, there are a lot of cases against a possible Santa Claus rally in 2013.
First, the biggest concern revolves around “taper”, or the Fed's policy to start to end monetary easing in the market. If the economy really is performing better (like the employment numbers show), the Fed may start tightening monetary policy sooner, rather than later. The next Fed meeting is December 17-18, with the minutes being released on January 8. This timeline could make the last week of the year more bearish, not bullish.
Second, the stock market is already up about 25% year-to-date. The case against more of a rally is: ‘how much higher can the market really go?' The truth is that the stock market has already returned 3x it's average return this year, so could a Santa Claus rally really happen given the current valuations? Chances are no.
Finally, in an unscientific Yahoo Finance! poll, 69% of respondents said they did believe a stock market rally would occur in December. But when a majority of people believe something in the stock market, it typically means that the opposite will happen. It's the sign of a bubble, and people get caught up in the hype. That's why this survey is a case against a Santa Claus rally.
While Santa Claus rallies happen, this year doesn't look like it's going to be the year. Just look back – we can call this whole year a rally, and it's tough to justify even higher prices in the next few weeks. Instead, I see more people locking in their gains and selling their losers ahead of tax time. That could mean we will see a small sell-off for the remainder of December.
However, if the earnings continue, I can see a January rally as more people inflow money into mutual funds and ETFs in the new year.
What are your thoughts on a Santa Claus rally this year? Will it happen or not?