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Mark Hulbert Archives | Email alerts
Dec. 21, 2011, 12:01 a.m. EST
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Finally, a Santa Claus Rally worthy of the name.
The stock market, at long last, is about to enter the seasonally favorable period that honestly can use the name "Santa Claus Rally." It begins at the close this coming Friday, the last trading day before Christmas, and lasts until the end of the year.
It's not a very long period of favorable seasonality "” just one week, after all "” but the historical odds are quite impressive.
Consider the performance of the Dow Jones Industrial Average /quotes/zigman/627449 DJIA -0.36% during this period. Since 1896, when this benchmark was created, it has produced an average gain between Christmas and New Years of 1.07%. On an annualized basis, that works out to a gain of more than 80%.
The market's performance during this period has been relatively consistent, turning in a gain 78% of the time. That compares to a gain rate of 54% for all other weeks of the year.
What accounts for this seasonal strength? A fascinating research study suggests that it has something to do with Christmas. And that, in turn, suggests that this strength really deserves to be called a "Santa Claus Rally" "” as opposed to all the other rallies during November and December, to which commentators shamelessly also give the title.
The study, entitled "Are Monthly Seasonals Real? A Three-Century Perspective," was conducted by Ben Jacobsen, a finance professor at Massey University in New Zealand, and Cherry Zhang, a Ph.D. student at the same institution. ( Click here to read their study. )
The researchers found that year-end seasonal strength became more pronounced in the U.K stock market around the time that Christmas in that country became a public holiday (around 1835). Christmas didn't become a public holiday in the U.S. until around 1870, and "” sure enough "” that's when year-end seasonal strength begins to be particularly pronounced in the U.S. stock market.
Furthermore, this year-end strength tends to be stronger in countries "where Christianity is strong and/or where people tend to celebrate Christmas."
Do the results and research reported here mean you should create a year-end trade in hopes of exploiting strength between Christmas and New Years? Only marginally. After all, an expected return of just 1.07% only barely pays for round-trip transaction costs.
The more legitimate use of the results presented here would be to alter the timing of transactions you were going to make anyway. If you were otherwise inclined to sell some or all of your stock holdings, for example, the existence of the Santa Claus Rally would suggest that you hold off on those sales until early January.
And if you were otherwise planning to invest a lump sum in the stock market in coming weeks, year-end seasonal strength would suggest that you might want to make that investment in the next couple of days rather than wait until January.
Click here to learn more about the Hulbert Financial Digest.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse
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