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Ho Ho Ho! It's The Santa Claus Rally

12/11/07 11:22:54 AM PST
by John Devcic

Can there be big price moves hidden in those stockings?

Santa Claus is not just for kids anymore. The buzz this time of year on Wall Street is about the Santa Claus rally. If Wall Street believes in Santa Claus, is it time for the investor and trader to believe as well?

WHAT IS THE SANTA CLAUS RALLY?
The Santa Claus rally is the name given for the rally in stock prices from the day after Christmas to the two days following the New Year. Most of you probably don't bother trading during this period, and who could blame you? The period of the day after Christmas to the New Year the volume can be pretty thin, so it's easy to think that maybe there is no real trading going on, let alone any kind of increase in share value. The Santa Claus rally has been talked about for years, and some people say it is true. The only way to find out for sure is to look at the numbers.

DOW DATA
I am going to start off with the Dow Jones Industrial Average (DJIA). The DJIA is one of the best market indicators around, so it will give us a good idea of how effective the Santa Claus rally really is.

Going back 20 years and 20 sample periods of the rally tell the story when it comes to the DJIA. Only looking at the trading day after Christmas to the two days into the New Year yields some surprising results. Out of the 20 periods of trading, only seven of them were down; two were down significantly. The first was 1999-2000, when the DJIA was down 393 points for those trading days; the Santa Claus rally was nowhere to be found. In 2004-05, the DJIA was down 145 points for the week. There was a loss in 1990-91 when the DJIA was down 63 points. The other losses were pretty small; one was 2.59 points in 1996-97.

Let's look at the plus side of the equation. Of the remaining 13 positive periods, seven were gains of 100 or more points for that week. That is astounding when you consider that trading is usually thin around that time. The biggest move was 1997-98, when the DJIA gained 300 points for that week. Following the 393-point loss in 1999-2000, the DJIA finished the last week of December on a high note by gaining 253 points. Of the six remaining positive weeks, only one had a gain of less than 70 or more points.

Further, in 1988-89 the DJIA only gained 15 points. Of the remaining five, four were higher than 80 points. What about last year, you ask? Well, it saw a gain of 73 points. The best case for the Santa Claus rally has to be consecutive years where the DJIA gained. The longest consecutive streak of gains for the DJIA began in 2000 and ended in 2004. During those four years, the DJIA combined to gain a whopping 735 points.

There was only one consecutive losing streak; DJIA lost 38 points during 1992-95. There were two streaks of consecutive years where the DJIA saw gains. Depending upon the final week of trading this year, we may continue or end the streak. So far the DJIA has gained 175 points for the last two closing weeks of the year.

THE NASDAQ
The case for the NASDAQ is pretty strong as well. Obviously, the numbers will not be as large as those on the DJIA, but using the same 20-year time frame, the NASDAQ was down only five times. The biggest Santa Claus rally move for the NASDAQ started in the 1996 rally period and ended in the 2003 period. During that time the NASDAQ gained 554 points -- a spectacular rally! The biggest gain for the NASDAQ occurred in the 1999-2000 period, when it gained 158 points for the week. Let's remember during that same period the DJIA was down 393 points.

THE S&P 500
Looking at the Standard & Poor's 500, however, we see a slightly different story. Over the 20-year time frame, eight of the periods were down. The worst was a consecutive losing streak that began in 1992 and ended in 1995. While the losses were not very big for the S&P, some of the gains were enormous. The biggest gain came in 2003-04, when the S&P 500 gained a staggering 126 points for that single week. While the S&P 500 does not have as many consecutive winning streaks as the DJIA, there is one of note: Starting in the 2000 period and ending in the 2004 one, the S&P 500 gained 193 points.

HERE COMES SANTA
Obviously, the S&P 500 and the NASDAQ have more stocks, and therefore their moves are not going to be as big as the DJIA. Clearly, there is indeed a pattern of buying and of big moves during that week of trading. While the other traders and investors seem to be taking it easy right before the New Year, the savvy investor can make some pretty good profits. Keep in mind trading volume during this time is going to be thin. Trade accordingly.

So is it time for investors and traders to believe in a Santa Claus rally? No one can be positive on this -- but based on the evidence presented here, that evidence being 20 years of past market performance, you cannot overlook some pretty big gains.

The last week of the trading year is usually overlooked by most everyone, and truthfully, it's hard to blame them. Of course, when you are presented with the chance of seeing some nice gains, especially when it comes to those DJIA stocks, you should pay more careful attention.

To sum it up, it seems that Santa really does have a nice gift in the form of gainers during the last week of the trading year.

John Devcic is a market historian and freelance writer. He may be reached at glatko@aol.com.



John Devcic

John Devcic is a market historian and freelance writer. He may be reached at drmorgus@gmail.com

E-mail address: drmorgus@gmail.com


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