Forecasting with the Santa Claus rally
Did you know that the Santa Claus rally is said to also include the first two trading days of January of the following year?
This may come as a surprise and leave you wondering, “Why should the first two trading days of the following year be included?”
The Santa Claus rally has always been regarded as a seasonal event generally described as “a surge in the price of stocks that often occurs in the week between Christmas and New Year’s Day.”
As a market event, the Santa Claus may have arisen from the natural process of the market to window-dress stock prices at the end of a trading period.
To some extent, the first two trading days of the following year sometimes fall within the week where the current year is ending. Thus, this would render the first two trading days of the following year part of the Santa Claus rally.
Together with the festive and merry mood of the Christmas season that have influenced people to become self-indulgent as they enjoy bigger disposable income, people also become increasingly lavish and profuse even in their investing decisions. This fueled stock prices to rise.
Soon, other factors have come into play. One is the impact of “accounting and tax reasons” where to trade stocks did not only make sense but also are necessary before the end of the year.
Because of all these developments, the first two trading days of the following year has become a relevant and integral part of the Santa Claus rally. For these reasons, the rally has technically become a standard of measurement of the market’s psychology and as an educational gauge of what the coming year may become.
In 2009, stock prices were on the rise between Christmas and the first two trading days of the following January. This became the market’s actual picture for 2010 on the whole.
In 2010, the behavior of the market on the last week of December 2010 and first week of January 2011 was also strikingly similar to the picture of the Santa Claus rally that occurred. The market seemed to be faltering.
In the last week of December 2010, the market was already on the fall. This obviously continued past the first week of January 2011 as it ultimately hit bottom at 3,705.50 on February 23.
The movement of the market also became complicated. The cycle into which stock prices traveled from such a movement, though, were by means negligible. Trading gains, and losses, were materially significant. Trading margins in individual stocks swung to and fro from a low of eight percent to a high of about 40 percent.
As of the close of trading last December 16, the market settled at 4,304.94 of the PSEi.
The market may just linger within striking distance of this index level until the end of the year and into the first few days of January.
It is true that several significant reasons will explain the market’s movement as it did. There was the birth of social awareness in Africa and the Arabian peninsula, the debt crises in the eurozone, and the state of the US economy, which remained a cause for concern among investors.
But beyond all this, the fact remains that the market’s pattern of movements for the year 2009 and 2010 fell into place, as indicated by the Santa Claus rally of the preceding year.
Based on the likely picture of the market’s Santa Claus rally this year, the market for 2012 may continue to move largely sideways within an average market range of 10 percent.
(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at [email protected] or directly at www.kapitaltek.com.)
