Waiting for Santa

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, December 23, 2022

Tis’ the season for the Santa Claus Rally! This unique seasonal pattern was first discovered by Yale Hirsch in 1972. Hirsch, creator of the Stock Trader’s Almanac, defined the period as the last five trading days of the year plus the first two trading days of the new year. This year’s Santa Claus Rally window officially opens on Friday, December 23. Given the challenging year for U.S. equity markets, including what could be one of the worst Decembers for the S&P 500 since 1950, investors are hoping Santa can deliver some positive returns and holiday cheer as we approach year-end.

The Santa Claus Rally usually generates headlines across financial media due to the historically strong market returns during this relatively short timeframe. As shown in the chart below, the S&P 500 has generated average returns of 1.3% during the Santa Claus Rally period, compared to only a 0.2% average return for all rolling seven-day returns.

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Lucky Number 7? If the S&P 500 finishes higher during this year’s Santa Claus Rally, it would mark the seventh consecutive period of positive returns. The longest streak was 10 back in the mid-1960s. However, positive returns during the Santa Claus Rally are relatively common, as the market has advanced 79% of the time during this period. For additional context, all rolling seven-day returns for the S&P 500 since 1950 have a positivity rate of only 58%.

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One of the other primary aspects of the Santa Claus Rally is its application as an indicator for future market returns. As Yale Hirsch stated, “If Santa Claus should fail to call, bears may come to Broad and Wall.” Historical returns, as shown below, give merit to his maxim, as the S&P 500 historically underperforms in January and over the following year when Santa no shows and doesn’t deliver investors a year-end rally.

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