"Santa Claus Rally" refers to the rise in stock prices that often occurs in the week between Christmas and New Year. The rally is also called the "Year-end Rally". There are numerous explanations for this phenomenon including tax considerations, happiness in Wall Street, and people investing their Christmas bonuses. Further, pension funds add new money to people's investment accounts every January. Many consider the Santa Claus Rally to be the result of people buying stocks in anticipation of the rise in stock prices during the month of January otherwise known as the January Effect.
s opine that the week between Christmas and New Year has historically been one of the market's best. Since 1972 the Dow has gained an average of 0.99% in the five sessions between the two holidays (Associated Press, New York). Another study which measured the performance of S&P 500 from the first trading day after the Christmas holidays through the end of the year (December 31) found that from 1980 to 2004 the Index has been up 64% of the times with an average gain of 45 basis points (December 27, 2005 in Market Analysis/Permalink). Though these two studies considered the period between Christmas and New Year, the Santa Claus Rally period is generally believed to be of seven days duration, i.e., five in December after Christmas eve and the immediate two days in the following January.
However, Mark Hulbert (CBS MarketWatch) writes, "There is no historical basis for believing that what the stock market does during the Santa Claus Rally period has any predictive power." From 1896, when the Dow Jones Industrial Average (DJIA) was created, Hulbert calculated the Dow's percentage gain over the seven trading sessions encompassing the last five days in December and the first two days in January (the price duration of the Santa Claus Rally Period) for each year. It is true that stocks have performed well during this period. On an average, since 1896, the Dow's gain over these seven trading sessions has been 1.81%. But following the years in which stocks performed poorly during this period, the stock market did no worse than it did following years in which stocks performed well. How the stock market performs in 2005 or 2006, will have nothing to do with how it performs over the seven trading sessions of the Santa Claus Rally period.
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