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Thursday, December 24, 2020

If Santa Rally Misses the Mark, it Could be a Warning Sign for Stock Markets

By Century Financial in 'Investment Insights'

If Santa Rally Misses the Mark, it Could be a...
If Santa rally misses the mark, it could be a warning sign for stock markets!

*This performance is only observed with historical backtests and not traded by the company.

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The last five trading days of the year and the first two trading days of the next year are defined as the Santa Claus Rally. This year the Santa rally started on 24th Dec 2020 and will end on 5th Jan 2021.

Looking at the statistics over last 70 years, these 7 days tend to be higher 77% of the times with average return being 1.2%.

Optimism over a coming year, holiday consumer spending boosting corporate sales, Institutions squaring up their books at year-end, and thin trading volumes with many investors on vacation could all be factors contributing to the bullishness of the stock markets.

The chart on the right illustrates how Santa Claus Rally has performed over the past 20 years. Usually these seven days are higher, which leads to strength in January. But what stands out is that during the times Santa didn’t show up in December, January was lower each time.

Year ending 7-day Santa rally January Returns Yearly Returns
2001 5.7% 3.5% -13%
2002 1.8% -1.6% -23%
2003 1.2% -2.7% 26%
2004 2.4% 1.7% 9%
2005 -1.8% -2.5% 3%
2006 0.4% 2.5% 14%
2007 0.0% 1.4% 4%
2008 -2.5% -6.1% -38%
2009 7.4% -8.6% 23%
2010 1.4% -3.7% 13%
2011 1.2% 2.3% 0%
2012 1.9% 4.4% 13%
2013 2.0% 5.0% 30%
2014 0.2% -3.6% 11%
2015 -3.0% -3.1% -1%
2016 -2.3% -5.1% 10%
2017 0.5% 1.8% 19%
2018 1.1% 5.6% -6%
2019 2.0% 7.9% 29%
2020 0.3% -0.2% 15%
2021 ? ? ?

Going back to the mid-1990s, there have been only six times that Santa failed to show in December. The month of January was lower five of those six times, and the calendar year also witnessed losses in 4 out of the 6 years. 2016 was the only exceptional year which recorded a solid gain of 10% (however, a mini-bear market occurred early in the year). Considering the bear markets of 2000 and 2008 both occurred after one of the rare instances that Santa failed to show makes many ponder upon this theory.

Year ending 7-day Santa rally January Returns Yearly Returns
1994 -0.1% 3.3% -2%
2000 -4.0% -5.1% -10%
2005 -1.8% -2.5% 3%
2008 -2.5% -6.1% -38%
2015 -3.0% -3.1% -1%
2016 -2.3% -5.1% 10%

Should this seasonally strong phenomena miss the mark this time, it could be a warning sign for the stock markets in 2021.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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