Is a Santa Claus Rally Coming to Town?

12/06/2002 12:00 am EST

Focus:

“December is here before it's June; my goodness how the time has flewn. How did it get so late so soon? asked Dr. Seuss. Indeed, 2002 will soon be another year in the history books. To the relief of many investors, the fourth quarter of the year has eased some of the market’s previous losses. In October, we highlighted seasonal trends that forecast an improving market. We now look at the historic Santa Claus rally for a glimpse of what may lie ahead.

Jim Dines has been publishing his Dines Letter for 42 years and there are few market seers who are as skilled in analyzing historic market trends and seasonality patterns. Says Dines, “Checking all Dow Decembers since 1961, our research department learned that 25 had risen, 7 declined, and 9 were neutral, for a bullish track record of 78%. Taking it back further to 1950, we find December as the best-performing month for the S&P 500 and second best for the Dow in terms of average percentage gain.

"While the number of advancing Decembers is more than triple the retreaters for the Dow, extreme movements have been rare. Since 1961, there have been seven Decembers with rises exceeding 5%. There have been no extreme declines. The overall impression of Decembers is one of churning neutrality, probably because of the buffeting cross-currents created by tax-motivated buying and selling. Actually, there often tends to be a rally top in November, followed by early December weakness and then late December rallies. The result is net neutral action.

"Popularly known as the Santa Claus rally, a short and sweet rally for traders has been observed in the S&P 500 during the final five trading days of the year plus the first two in January. This year, this pattern would begin on December 24th and run through January 3rd. The average rally shows a gain of 1.7%. Others measure the Santa Claus rally by calculating the difference between the low Dow close in November or December and the high Dow close in December or January. We have found that the 57-year average of these Santa Claus rallies shows a gain of 9.91%

“Taking the fourth quarter as a whole, historical records show it outperforming all the other quarters, having posted gains for the Dow in 58 out of 82 years, or 71% of the time – as against 59% for the other three quarters. The fourth quarter gains averaged 2.58%. Focusing on more recent times, an impressive 4.9% gain in the S&P 500 has occurred over the past 22 years. Eighteen years were winners (82%) and only 4 were losers. Since 1988, fourth quarter rallies have averaged 5.9%, with only 2 downers out of 14 years.”

I would also note that Jim Dines is bullish on the long-term prospects for gold, and offers the following seasonal advice: "Counting the last 33 Decembers, our gold stock average has risen 17 times and declined 16 times. However, looking ahead, the first quarter is seasonally positive for gold and silver stocks, so purchases made on weakness during Novembers and Decembers usually work out profitably based on seasonality." 

Jim Stack, editor of InvesTech Market Analyst, adds, "There are a number of factors that many contribute to the seasonal strength known as the Santa Claus rally. First, Christmas time is the strongest retail period of the year. In addition, investors and corporations usually make year-end contributions to IRAs and pension plans. In addition, financial forecasters almost always issue upbeat year-end forecasts. And the holidays themselves tend to lift investor spirits. When has Santa steered us wrong?  Only twice since 1970. In both cases, investors enjoyed a convincing Santa Claus rally only to see the bear market return as the new year progressed. Those exceptions occurred during big multi-year bear markets in 1973 and 2000. And only once in the last 30 years (in 1977) has the market entered this seasonally strong period with a year-to-date loss and gone on to suffer a further significant decline from December to January. So take a deep breath, relax, enjoy the holiday season, and don't let the Grinch steal your Christmas spirit. While not complete, there's growing evidence that the market bottom may be behind us."

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