Saturday, December 12, 2009

Santa Claus rally

This is the time of the year when people are preparing for the Christmas holidays and for the end of the year. For stock market watchers, it's a time to reflect on where the market has been and where some think it is going in the future. Many people want to know if this is a good time to be invested in the market or if it's time to get out. One interesting thing about this time of year, is the notion of the "Santa Claus rally". It is a widely held truism that the stock markets out-perform during the last two weeks of December. Over the years the time frame has varied from a two week period to the whole month of December, and some even let it overlap into January. As with any statistics, there are times when it performs well and times when it does not, but the Santa Claus rally, does seem to exist most of the time. Consider this tidbit from Steven Halpern's TheStockAdvisors.com website article:

"Whatever the reason, in the last 40 years Santa has rarely missed a beat. By looking at the performance of the S&P 500 from November 20 through January 31 each year, we note that...

  • Excluding bear markets, only four years resulted in a loss for the period. The biggest decline was in 2002-2003, when a retest of the major bear market bottom caused the Index to drop 6.4%.
  • Considering the entire 80 years of S&P 500 data, only two years saw a decline of greater than 10%. That occurred in the middle of major bear markets in 1931 and 1969.
  • Conversely, a number of years have seen exceptional gains. Ten Santa Claus Rallies out of the past 80 years have produced gains in excess of 10%. Five of those hefty rallies occurred during the dismal stock market decade of the the 1970s.

Now, if you are a long term or "buy and hold" investor, the Santa Claus rally effect doesn't really matter, although most people will be happy when the markets go up. And one wouldn't think that there are too many people who only invest during this time of the year. For most people, the Santa Claus rally is a nice anecdote and provides some interesting small talk at holiday parties and happy hours. My general advice is, the best time to invest is when you have the money.

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