To The Moon

Year-end rally that catapulted the Dow Jones Industrial Average and Nasdaq 100 to record highs earlier this week is likely to extend into next week.

This is because the stock market has a strong tendency to rise during:

• The last 5 trading days of the year.

• The first two trading days of the new year.

This is commonly referred to as the Santa Claus rally.

The phenomenon was discovered in 1972 by Yale Hirsch, creator of the "Stock Trader's Almanac".

When is Santa Claus rally in 2023 ?

This year, the Santa Claus trading window begins on 22 Dec 2023 and ends on 03 Jan 2024.

What history says about Santa rally?

According to historical data dating back to 1950, the $S&P 500(.SPX)$:

• Posted an average return of 1.3%.

• Is positive 79% of the time during the Santa Claus trading window, according to data from Carson Group's Ryan Detrick.

• The period marks the strongest 7-day period in which stocks are reliably higher, and aids December in being the best performing month of the year for the stock market.

Looking even further back in time, to 1928, the S&P 500 index:

• Posted an even better average return of 1.6%.

• This is according to data from Bank of America, analyst Stephen Suttmeier.

• "The Santa Claus rally is real" says Suttmeier.

For 2023, if the above type of gain materializes, it would send the S&P 500 to new record highs.

President cycle - new US market rally’s stimulus?

Adding to the factors driving the US market rally, analyst Suttmeier points to a “new” trend: as a presidential cycle transitions from December of year 3 to January of year 4, the S&P 500 has risen an impressive 70% of the time, with an average return of 0.90%.

What if it does not happen?

Besides highlighting the “positives”, it is important to mention “the flip side” possibility as well.

If a Santa Claus rally does not materialize over the next week, 7 trading days, it could serve as a warning sign to investors that the coming year might see a weak start for stocks.

In the past 30 years, there were 5 instances when stocks posted negative returns during Santa rally period.

In all 5 instances, all stocks were lower during the January month.

For the records:

Carson Group's Ryan Detrick pointed out that years 2000 and 2008, not exactly stellar years for investors, also missed out on the usual December surge in the stock market - a potential red flag.

He further noted that a lack of the 'Santa Claus rally' in 1994 and 2015 was followed by negative full-year returns."

In parting, Hirsch coined the phrase, "If Santa should fail to call, bears may come to Broad and Wall."

My viewpoints:

I have decided to deep dive into the “for the records” section (see above) information.

• There are 4 sets of data for years 1994, 2000, 2008 and 2015.

• Each data set is sub-divided into (a) “preceding” year Dec into “following” year Jan and (b) following year YTD performance.

• All 4 data set did not experience Santa rally. 2 of 4 registered mild gains and remaining 2 registered losses.

• The 2 data set that registered gains (1994 & 2000), the YTD performances were negative.

• The 2 data set that registered losses (2008 & 2015), the YTD performance was “mixed” — one positive and one negative.

3 Composite Indexes’ moving averages (ma):

Apart from verifying the writer’s data and debunking it in the process, I have also compiled the moving averages (ma) for Dow Jones, S&P 500 and $NASDAQ(.IXIC)$ . (see below)

• All 3 composite indexes’ are above its 20-day, 50-day and 200-day moving averages respectively.

• All 3 composite indexes’ 50-day ma is above its 200-day ma.

• All 3 composite indexes’ Relative Strength Index (RSI) is in the 70 banding range.

• In case you are unfamiliar, there are different bands for the RSI’s readings.

• With the 3 composite indexes’ RSI in the 70s banding, the interpretation is “overbought”.

• Overbought does not mean sell.

• Conversely, “oversold” does not mean buy either.

• These zones suggest potential for a trend reversal and are not guaranteed.

• When it comes to Technical Analysis (TA), there is a need to use other indicators and analysis to confirm signals.

Factors (I think) that fueled Santa Rally:

(1) Slowing inflation: 

• As Mr Powell has mentioned, inflation has been cooling faster than expected, which puts less pressure on the Fed to aggressively raise rates. 

• With the latest November 2023 core PCE continues to dip to 3.2% (from October’s 3.5%), this is generally seen as positive for equities.

(2) End of rate hikes: 

• It definitely helped with Mr Powell's comment that discussions of rate cuts are "coming into view" further bolsters optimism. 

• Lower borrowing costs could unlock potential in certain sectors, stimulating growth and market gains.

(3) Seasonality: 

The historical trend of a Santa Rally adds a psychological element that could fuel momentum.

As of Fri, 22 Dec 2023 — this December 2023 (so far) is following historical precedent. The S&P 500 is up +4.3% and the $DJIA(.DJI)$ is up +4.7%, respectively.

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• Do you think Santa rally will continue on 26 Dec 2023 and into January 2024?

• Do you think year 2024 will end in gains or losses after considering all the factors ?

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