Word on the web: Is the Santa Claus rally coming to town?

A ‘Santa Claus rally’ – whereby the FTSE 100 posts a positive return in the month of December – has occurred 26 times in the past 31 years. Will it occur again this year?

December is upon us, which means that Christmas is just around the corner. And it’s not just children who are on the look out for signs of Saint Nicholas. Investors will be hoping to see the (almost) annual Santa Claus rally. On the surface of it, the chances look good. Over the past 31 years, the FTSE 100 has only failed to post a positive return five times. So, what can be expected this year? Will it be a Christmas bonus or a proverbial lump of coal?

Most predictableEd Monk, Investment Editor of The Telegraph, notes that you don’t have to go very far back to see this stock market superstition fall off: “The most recent failure of the market to rally in December came last year, when the blue-chip index fell by 2.3%, the first December fall in the FTSE 100 for 12 years.” 

However, he states that despite last year’s fall, the 12th month remains one of the most predictable: “There is even a pattern to how the FTSE 100 behaves in December: gradual rises for the first two weeks, followed by two weeks of stronger growth. The final two weeks of the year are statistically the strongest fortnight in the calendar, according to numbers crunched by Axa Wealth. Its figures show that, taken together, the past 31 Decembers have seen the FTSE 100 rise by 72%.”

Monk takes the opportunity to explore some other seasonal market myths. “Perhaps the most famous is to “sell in May and go away, buy again St Leger Day”. The theory goes that lower volumes of trading in the summer holiday season exacerbate losses.

“If that sounds flimsy, it’s because it is. The ‘sell in May’ adage has come true just 11 times in the past 30 years.”

The Telegraph opinion

Speculative juicesWriting for Real Money, Jim Koford says that, with the ever-changing nature of financial markets, the reliable nature of the Santa Claus rally should be cherished. He adds that as America celebrated Thanksgiving last month, there were signs that it is indeed on its way. “The broader market did very little, but under the surface, there were some terrific opportunities in several thinner, speculative names. Oftentimes, the stocks that fly higher around the holidays will quickly give back gains as traders flip the switch and look to play downside reversals.

“However, it does show that market players are looking for action, and that can spread out into other areas, particularly as we head into the seasonal period known as the Santa Claus rally.”

He adds that while from a broader technical perspective, the indices are back in the same narrow range they've been in for most of the year: “As of now, the troops are doing a good job of repairing the damage from August, and the bounce off the 2,020 level in the S&P 500 a couple weeks back was particularly significant."

Koford questions whether all this means a strong end to the year: “We'll see, but for the time being, I know that there are plenty of shorter-term traders hoping that the speculative juices continue to flow.”

Real Money article

Data detailsPeter Switzer, writing for his blog Switzer Daily, says that several upcoming data releases, especially US job figures for November*, could influence whether or not the rally arrives. The latest reading Americans received for October was much better than expected. "CNN described it as ‘a blockbuster month in America for jobs!’,” he says.

“There were 271,000 created, killing expectations of a lot lower number and taking unemployment down to 5%, which was the best reading since 2008 and the GFC.

Switzer points out that “the final insight on Father Christmas’ movements this year will come on December 16 … when the Fed possibly makes its momentous decision on interest rates”.

Switzer Daily blog

*Just prior to publishing this article, we learned that the US economy beat forecasts to create 211,000 new jobs.

Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk 
Published: 04 Dec 2015
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