Santa Claus Rally | Podcast Episode #75

0:00
Hey, everybody. This is Ryan Mallory with Swing Trading the Stock Market, and it’s been a while since I did my last podcast. I think it’s been about, what, 2 weeks or so? 3 weeks, 3 weeks I think is how long it’s been because I’ve missed the last 2 weeks. Obviously, the first one was for the Thanksgiving break, and then the second one was for trying to get caught up from being off for Thanksgiving. So it’s, I’ve been playing a little bit of catch up here, but I’m excited to do this podcast episode. Today we’re talking about the Santa Claus rally, and it’s this phenomenon that goes on in this market for years and years and years now where there tends to be a rise in stock prices during the last 5 trading days in December and the 1st 2 trading days and the January that follows.

0:40
Now, if you take a look at the stock trader’s Almanacs, so I’m gonna give them credit here, it’ll tell you that the stock market rises about 1.3 percent on average during those seven trading days, and historically speaking, the stock market is up 76 percent of the time. And let me tell you that’s very well above average. But then you say, well, what about last year because December of last year, that was horrendous. It was really bad last December. I know, I know the stock market was dropping like a rock last year. I actually had a profit during that time, which is kind of cool. I like to brag about that a little bit, toot my horn. But in any case, on the surface, you would think there was no way that there was a Santa Claus rally last year in the stock market when the month of December was down double digits as a whole, but if you look at when technically speaking, the rally started, which would have been Monday, December 24th in the five days that followed.

1:39
That would take you to December 31st. Ironically, we had, if you remember, it was one of the greatest rallies of all time. Of course, it was a massive, you know, bounce off of some extreme lows, but the S&P, I think, rallied over like 110 points or something crazy like that, the Dow, and I’m just trying to remember based off a memory here, but the Dow, I think like rallied 1100 points, the NASDAQ probably rallied like 10 million points. But no, seriously. There was a Santa Claus rally last year. It was probably the most desperate Santa Claus rally that’s ever been needed, but yes, we had a Santa Claus rally there. When the Santa Claus rally started, the S&P had closed a prior day at 2416.

2:25
The end of the year, it closes at 2506. So you have about a 3 plus percent rally. Now, the Santa Claus rally also extends into the new year too. So January 2nd and January 3rd. Now, the funny thing about that is, is that those two days were actually down. And then thereafter, the market basically hasn’t looked back yet. So there was a two day sell off where on January 2nd, the market opened lower, finished 4 points higher, but the following day, there was a massive sell off. You saw the S&P go from 2510 all the way down to 2447 and close it. And then it looked like we were going to definitely go test the December lows again, which we didn’t do.

3:02
That was just that sell off on December or January 3rd was just a weird anomaly. I believe it also took place when Apple was warning on some of their future earnings guidance, which it’s kind of laughable now when you consider where Apple is at at this particular moment, trading at new all time highs, but yeah, it was a very weird day. The market sold off pretty hard and then it’s just been on a tear ever since. The market went from January 3rd where it closed at 2447 to closing at the end of the month at 2704. So a massive rally, massive rally, 250 points worth.

3:38
But that’s beyond the scope of this podcast. What we’re really talking about is Santa Claus rally. So, we had, we’ll talk about the 5 days here from last year. You had the 24th, which sold off, then you had the 26th that saw the massive rally. The 27th, which rallied again and tried to sell off intraday, but it came back with flying colors. The 28th sold off. But then you had the 31st that rallied the first or the first day of the trading year on the 2nd of January that rallied just a little bit and then a pretty big sell off on the 3rd. Overall, what was the net result? A Santa Claus rally that went from 2416 all the way up to 2447.

4:19
Pretty large bandwidth in terms of the lows and the highs, but nonetheless, it did rally. Not much when you take all those days into account, but it did rally. But let’s go ahead and talk about the month of December as well, particularly when it comes to trading around the Christmas period, because there’s a lot of low volume trading at this time. You have a half day of trading right before Christmas, and then you have Christmas obviously off. Then the market, if there is a trading day following Christmas this year, there is on the 26th. That’s going to almost always be a low volume day. So from the, the Santa Claus rally is usually marked by very low volume, and then of course you have the last day of the trading year, and that can also be a very quirky time.

4:57
I mean, you have a lot of people that are making moves at the very end of the year, and a lot of times their losses, they’re cashing out their losses so they can take them for tax write offs. So you’ll see some of the stocks from the course of the past year that were really bad get even worse because people are all of a sudden saying, you know what, I want the tax write off. I’m gonna take it. I’m gonna sell that stock. Sometimes they’ll, if they still have hope for the stock, they’ll just buy it back next year. But then their longer term stocks, right? Let’s say they’ve been holding Apple all year long, right? They bought it on January 1st or they bought it on March 1st or June 1st.

5:35
Well, they’re not gonna cash that out because they don’t want to pay taxes on it. So if they were to cash out, they would probably wait till the new year. Or at least wait until they had like a year’s worth of gains or something on there so they could get long term capital gains. Now, let me just tell you, I’m not a tax advisor by any means. I don’t get a lot of what takes place with the tax code. I have my own accountant. I give my accountant the information and he takes care of the rest. But yes, towards the end of the year, some of the losing stocks from the year at hand will get worse. The better stocks tend to get a little bit better because of window dressing, portfolio managers wanting to say, yes, I was in Apple, or yes, I was in Facebook or Bank of America.

6:12
So the good stocks get better, the bad stocks tend to get a little bit worse. That’s not to say that’s going to happen every year, but over the course of time, that tends to be the case. I also find personally December to be pretty tricky. It’s a very strong stock picker market, so just because the market’s going up doesn’t mean all the stocks are going up. I always find the breadth to be a little bit questionable because of some of the things I’ve just talked about about people wanting tax write offs because of the low volume, etc.

6:51
Now I talk about historically, people like to sell their losers for tax write offs, but what about last year? Because the market actually bottomed during the Santa Claus rally last year. That means the best opportunities were in stocks like Apple, like in Facebook, stocks that just had these monstrous rallies off of significant lows. I actually bought Apple and Facebook and some others when the market was at those lows back in late December because I used indicators like the T2108 that showed that we were at some historically oversold levels and the market was due for a bounce. And so I added some on there.

7:30
And so you can actually say that that phenomenon of where people sell their losers for the tax write offs wasn’t necessarily happening because that was where we actually bottomed, that was during the Santa Claus rally and if you were selling Apple or if you were selling Amazon or if you were selling Facebook or a whole host of other stocks out there because everything was getting butchered during the 4th quarter of last year, well then you were selling at the lows and the market just rallied. So we had this historic rally that took place during the Santa Claus rally. So the whole point of all this is not to confuse you, but to say nothing is definite in the stock market.

8:06
You’re going to have years where the Santa Claus rally doesn’t happen. I’ve seen many years where the Santa Claus rally doesn’t happen. And if you go full fledged into the Santa Claus rally, the last 5 days of the trading year and the 1st 2 days of the new trading year, thinking that you’re entitled to some profits, you can be sorely disappointed because it doesn’t always happen. And right now, we are at some incredible market highs. Who knows what’s going to happen towards the end of the year? Maybe traders will get a little bit of cold feet with the election year ahead and say, you know what, I’m gonna book some of these profits, or will it just continue to go higher. It’s hard to say.

8:50
What I’m trying to give you is give you an understanding of what the market has done in the past so that you can apply it to your trading in the future, not with a 100 percent certainty, but with an idea of what can be expected. So let’s wrap this up. I want to go over the points. What is this Santa Claus rally? It’s a period of the last 5 days of the trading year in December and the 1st 2 trading days of January. Where the market tends to be very bullish. 76 percent of the time, it has rallied, tends to have low volume. You start seeing stocks that have been notorious losers throughout the trading year see even more losses as people are selling them for tax write offs.

9:26
You see window dressing by the big brokerage houses and because they want to show people that they were in the stocks that rallied throughout the course of the year. And December in general, it can be pretty tricky for trading. It’s more of a stock picker’s market because of the low volume and be aware of the last day of the trading year. That can be really crazy. You have, especially in like the final hour of trading, it can just go all over the place, so be aware of that as well.

9:42
That’s gonna do it. I’m gonna wrap this podcast up. If you have any questions, feel free to hit me up and ask me anything you like at ryan@shareplanner.com. And yes, I will be back on a regular podcasting schedule going from now until the end of the year. Well, let me back that up. Probably won’t be doing a podcast on Christmas Day since that falls on a Wednesday. Hopefully, I can get one out that week. If not, that will only, that will be the only day that I don’t get one out. Um. Otherwise, 2020, I can’t believe I’m even saying that, the year 2020 is upon us, and yes, I will be doing my podcast as regularly scheduled.

10:20
Thank you. Take care. God bless.