Santa Claus Rally: Managing Expectations for the Year-End Stock Market Boost

Pete Biebel from Benjamin F. Edwards suggests that a portion of Santa’s generosity may have already been distributed, indicating a potential early start to the anticipated Santa Claus rally on Wall Street. This traditional rally is characterized by the stock market‘s tendency to ascend during the final five trading days of the current year and the initial two sessions of the new year, as defined by the Stock Trader’s Almanac.

This year’s rally spans from Friday to Wednesday, January 3.

Historical patterns indicate that stocks might experience positive momentum in the next six trading days, given the consistent occurrence of the Santa rally almost every year. Since 1950, the S&P 500 has, on average, seen a 1.3% increase over this seven-day period, with a 78% higher closure rate during the Santa Claus trading window in the past 75 years, and gains observed over the last seven years, according to Dow Jones Market Data.

However, this time, the stock market has already seen significant gains before Christmas, prompting some analysts, including Ed Yardeni of Yardeni Research, to suggest that the Santa rally has arrived “ahead of schedule.” Despite the upbeat market mood, Pete A. Biebel notes that the market may be somewhat extended, tempering expectations for the traditional Santa rally period.

The midweek dip on Wednesday, resulting in the Dow Jones Industrial Average’s largest one-day percentage decline since October, serves as a cautionary signal. Biebel suggests that the market’s buoyancy might be showing signs of potential trouble beneath the surface, emphasizing the need to dial back expectations for the traditional Santa rally.

While the recent pullback lacked a clear fundamental trigger, some attribute it to increased trading of zero-day to expiry options (0DTE). Analysts also point to overbought technical conditions and low year-end trading volumes as contributing factors.

Despite the caution, some analysts advise against betting against the seasonal momentum, especially in a bull market with a strong uptrend. Historical data shows a correlation between stock-market returns during this period and returns in January and the subsequent year. The potential for a Santa rally exists, but analysts anticipate a possible hangover and reset in January or February due to overbought conditions.

In summary, the market finished mostly higher on Friday, capping an eighth consecutive positive week for major indexes. Whether investors will receive the expected seasonal presents in 2023 or face challenges from an extended rally remains uncertain, emphasizing the speculative nature of the Santa rally.