- A seven-day trading period known as the “Santa Claus rally” is set to take hold of Wall Street and could push the stock market higher into year-end, according to LPL’s Ryan Detrick.
- Based on historical data, the stock market has returned an average 1.3% and is positive 78% of the time during the seven-day window that starts on Christmas Eve and ends in early January.
- And if a Santa Claus rally fails to materialize, it could serve as a warning sign that further market weakness is in store for the start of next year.
- “If Santa should fail to call, bears may come to Broad and Wall,” said Yale Hirsch, creator of the Stock Trader’s Almanac.
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A “Santa Claus rally” is set to take hold of Wall Street as investors look for a strong finish in the stock market, according to a note from LPL chief market strategist Ryan Detrick.
The seven-day trading period that starts on Christmas Eve and ends in early January is known as the “Santa Claus rally” because of a strong tendency for stocks to post gains during the Christmas holiday period.
The phenomenon was discovered in 1972 by Yale Hirsch, creator of the Stock Trader’s Almanac.
According to historical data dating back to 1950, the S&P 500 has posted an average return of 1.3% and is positive 78% of the time during the last five trading days of December and the first two trading days of January.
According to Detrick, the period marks the strongest seven-day period in which stocks are reliably higher, and aids December in being the best performing month of the year for the stock market.
The cause for the move higher in stocks?
“Whether optimism over a coming new year, holiday spending, traders on vacation, institutions squaring up their books before the holidays – or the holiday spirit – the bottom line is that bulls tend to believe in Santa,” Detrick explained.
But if a Santa Claus rally doesn’t materialize towards the end of the year, it could serve as a warning sign to investors that the coming year might see a weak start for stocks.
Over the past 20 years, the five times stocks posted negative returns during the Santa Claus rally period, the month of January was lower for stocks each time.
“Should this seasonally strong period miss the mark, it could be a warning sign,” Detrick said.
Accordingly, Hirsch coined the phrase, “If Santa should fail to call, bears may come to Broad and Wall.”
The New York Stock Exchange is located at the corner of Broad and Wall Streets.