Is The Santa Clause Rally Truth or a Legend?

Is the Santa Claus Rally a myth or is it real?

Ever since I've been trading I've heard of the Santa Claus Rally and its effect on the market.

Can we count on it?

Is it real?

I was a person trained in the sciences. The only way to answer such a question is just to investigate.

You've probably never heard of the law the instrument but you have heard this old saying that says if you're a hammer, everything looks like a nail.

So the law of the instrument is a cognitive bias that involves over reliance on a familiar tool or a conception.

My question is, "Are we treating December like a hammer and the Santa Claus Rally is the nail because at one time several years ago we saw this rally really happening every year?"

Well, first let's define what the Santa Claus Rally is.

 There are two schools of thought on this and it's all about the timing.

The first thought is that it happens right after Christmas through the first couple of days of New Year.

And the second scenario suggests that it is the week leading up to Christmas Christmas Eve.

We're going to look at both of those.

Over the years many analysts have tried to speculate about the reasons for the Santa Claus Rally. They perceive the causes included an overall holiday season spirit. Retail traders were really high and bullish and institutional players at that time tended to step back from the market.

2012

It was the last quarter through the end of the year and think about 2012 Obama just got reelected. We were kind of coming out of the global financial crisis. It was at least under control. There was a major stimulus package out there for health care and financial reformations. It was also the end of the US military presence in Iraq. So lots of things were going on.

We're going to say who won - Santa Claus or the Grinch?

Well, you can see right there, there was a rally right before Christmas in 2012. So Santa Claus won and then right after the Grinch won because it was going sideways slightly down.

2013 

The week leading into Christmas, the Santa Claus Rally was in effect. And right after Christmas, it was also in effect. Tt was going up slightly now right after the new year.

You can see there was a down day that's not a typical at all.

2014

Again, Santa Claus Rally right before and then the Grinch took over right after Christmas

2015

Santa Claus Rally in effect right before Christmas and then the Grinch took over.

So we're seeing the Santa Claus effect right before Christmas and more of the Grinch through 2015.

2016

Well, it was flat as a pancake and slightly down so the Grinch won that season. Santa Claus didn't have a chance right after Christmas. It was the Grinch all the way in 2016.

2017

Again, very flat leading into Christmas and then a downturn right after Christmas.

So again, the Grinch won out in 2017.

2018

A gradual rally happened because going into Christmas the market was bad. And then Santa Claus took over after Christmas.

2019

You can see Santa Claus was in effect. It was slightly up. It was a rally. Santa Claus is still in effect there too.

2020

Slightly down right before Christmas, and slightly up right after Christmas.

2021 

The Market is slightly down and then again, slightly down. So overall, this is the total the week before Christmas. It was five and six and Santa Claus won out just by one week there. After Christmas, it was five and four.

So does the Santa Claus effect really exist?

I looked at the historical performance of the S&P over the last decade. And conclude it's nearly a toss up between the tangible rally and the normal trading week.

Now let's think about you and your trading. Rather than just going around being a hammer hitting everything you think is a nail, I would advise you to get some education, learn how to look at the markets in a very rational way and be able to set up great trades.

At Investing Buddies, we've got a great educational pathway. And to make it easy for you to know where to start on this pathway, we have a quiz for you to take.

It's a simple yes or no quiz. And those answers are going to point you to the best starting place on this pathway.

Hit the button below to take the quiz and get started in this incredible world of options trading.