Tuesday marks the first day of the famous Santa Claus rally period, which runs from the last five trading days of the year through the first two of the new year. The rally (or lack thereof) uses price action to predict how the year will unfold. (The term was coined by Yale Hirsch, the curator of the Stock Trader’s Almanac.)
The saying goes like this:
“If the Santa Claus rally should fail to call, bears may come to Broad and Wall.”
Basically, if markets don’t rally during the most seasonally bullish time of year, it means there could be trouble ahead in the new year. Like any anecdote, this is not a guarantee – but it does have a pretty good track record.
2019 is turning out to be a banner year for the markets, one of the best in history. Its stellar performance comes on the heels of the worst December since the 1940’s. We finished 2018 with a whimper, but interestingly enough, the Santa Claus Rally period was positive. Even with huge down sessions on December 24 and January 2, the markets finished the week up by about 1% on January 3 (the last day of the rally) to save the day.
Lo and behold, 2019 saw only two down months (May and August).
What is the setup for this year’s edition of the Santa Claus rally?
Markets are clearly overbought and are in need of a rest, but then again the indicators (breadth, volatility, put/call ratios) and statistics are not rolling over yet. There is plenty of time for markets to sell down in the new year and then bounce back, which is how it may play out this time around.
Markets could go any which way, but certainly the bulls are in charge here. If the Santa Claus rally is poor, there will be worries about the coming year. As traders leave their desks for the holidays, the trading will get thin, erratic and responsive to news and tweets. We’ll be a little more guarded and look for some great trading opportunities in the new year.