The Santa Rally meme has been spread through the mainstream media and the various bullhawks, particularly Clifford Bennett who called it on the 1st December, to finish the year a bit more joyfully. First what is “The Santa Rally”, how statistically significant is it, and what are the chances of it occurring this year?
I’ll lean on the first two questions via ASXIQ, whose data laden statistical blog on the Australian share market is a gold mine, and who linked the following definition from Investopedia:
A surge in the price of stocks that often occurs in the week between Christmas and New Year’s Day. There are numerous explanations for the Santa Claus Rally phenomenon, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week.
ASXIQ then puts together the numbers (including backtesting trading the Santa Rally strategy) and came up with the following, for the All Ordinaries Index (similar to the ASX200). The average Santa Rally since 1984 was 1.33% in magnitude (the largest being 5.9% in 1987, the weakest last year at 0.32%):
The final question, given that over 80% of the time, Santa Rallies have occurred is will it happen again. Since December 1, the ASX200 has gone up 20 points, after rallying for 3 days and falling the rest:
However, the real starting point is the week of Christmas, so assuming the market closes at its current level tomorrow at ca. 4150 points, the ASX200 would rally to 4200 points on average, or if it matches the 1987 rally, up to 4390 points.
If the former occurs, which is the most likely, that would take us back to the average price since early October. On the outside chance of the latter, an above average rally would return the local bourse to its highest closing price reached since August and may give the impetus for a sustained bear market rally going into 2012.
Given that the USD is undergoing a strengthening uptrend, with commodity prices falling, Asian economies slowing down and the big four banks downgrades impacting ASX8 valuations, are we instead looking at a Grinch like Christmas for equities?