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It is not a little known fact that historically the action of the stock market has been relatively favorable both around holidays and towards the end of the year.  But some question remains as to just how favorable things have been during these periods and how often.  So let’s address it.

The Year-End (or “Santa Claus”) Rally

Different analysts will look at historical data and draw different conclusions.  This is actually a good thing, otherwise everyone would be trying to buy or sell at the same time.

But in the opinion one analyst (“Hi, my name is Jay”) the “year-end rally” period (or as I like to call it the “Santa Claus Rally”):

*Starts on the Monday before Thanksgiving

*Ends at the close of the third trading day of the following January

Have I mentioned lately that this stuff doesn’t need to be rocket science?

So how has this period performed?  We will start our test at the close of trading on Saturday (yes, Saturday) November 19, 1949 and examine what would have happened to a hypothetical $1,000 investment in the Dow Jones Industrials Average that was in the market only during the bullish year-end period described above (in other words, the trader would buy the Dow Industrials Average at the close on the last trading day prior to the Monday before Thanksgiving and would hold through the close of the third trading day of the following January.  The rest of the time the “system” is out of the market.  For our purposes, no interest is earned so as to reflect only the gains made during the bullish year-end period).

The results appear in chart form in Figure 1.Figure 1 – Growth of $1,000 invested in the Dow Industrial Average only during the bullish year-end period described in text

Figure 2 displays the annual year-by-year results in table form.

Figure 2 – Year-by-Year “Santa Claus Rally” % +(-)

A few performance notes:

# times UP = 54 (83% of the time)

# times DOWN = 11 (17% of the time)

Average% +(-) = +3.19%

Median % +(-) = +3.08%

Largest % Gain = +13.87% (1991-92)

Largest % Loss = (-3.69%) (1977-78)

It is also worth noting that the year-end rally period has witnessed a gain for the Dow in 27 of the last 29 years and 33 of the last 36 years.

Summary

So do the results displayed in Figures 1 and 2 guarantee that the stock market is destined to rally in the near future?  Ah there’s the rub.  For the answer is “not necessarily”.  Still, investing is in many ways a game of odds and probabilities.  While one always needs to be prepared to act defensively if things start to go south, history suggests that traders and investors might do well to give the bullish case the benefit of the doubt between Thanksgiving Week and early January 2015.

Or to put it more succinctly:

Jay’s Trading Maxim #215: Santa Claus is real (approximately 83% of the time).

Jay Kaeppel