Sunday

Christmas Santa Rally 30 Year Statistics: Does the Santa Rally Exist?

Post a Comment December 13, 2009 – 5:41 pm |   | Permalink |  Print This Post |

We have been reading so much about Santa Rallies, the bears(and contrarions) claiming that “most investors are expecting a Santa Rally” hence as a contrarion it’s best to short the market. We looked into the last 30 years from 1978 up to 2008/2009. We picked 4 time points:

• 7 Dec (Pre-Christmas) - we picked 7th for no particular reason, and did not exclude 1st Dec to make our numbers look good
• Christmas - Last trading day before Christmas holidays (usually 22-23rd Dec)
• Post-Christmas (last day of trading before Christmas - 1 March)
• Post Christmas (last day of trading before Christmas - 1 April)
• We calculated March minus April to see if there was a net fall between March to April.

Here is the raw data (Click to enlarge tables and charts):

Santa Rally 30 Year Statistics 1978-2009

Santa Rally 30 Year Statistics 1978-2009

30-Year Santa Rally Statistics 1978-2009

Christmas Santa Rally 30 Year Analysis:1978-2009

30-Year Santa Rally Statistics 1978-2009: Post Christmas (24th Dec) up to 1st March

Christmas Santa Rally 30 Year Analysis:1978-2009

Christmas Santa Rally 30 Year Analysis:1978-2009

30-Year Santa Rally Statistics 1978-2009: Post Christmas (24th Dec) up to 1st April

Santa Rally 30 Year Analysis 1978-2009 : Fact or Fiction

Santa Rally 30 Year Analysis 1978-2009 : Fact or Fiction

30-Year Santa Rally Statistics 1978-2009: 1st March - 1st April Change

30-Year Santa Rally Statistics 1978-2009: 1st March - 1st April Change

30-Year Santa Rally Statistics 1978-2009: 1st March - 1st April Change

Our Conclusion

7th Dec to Last Trading Day of Christmas

• 1.5% rally (31 year average)
• % Rally: 67%

7th Dec to 1 March (not shown in table)

• 3.07% rally

7th Dec to 1 April (not shown in table)

• 3.73% rally
  

First Day of Trading After Christmas - 1 March

• 1.53% rally
• % Rally:  64.5%
  

First Day of Trading After Christmas - 1 April

• 2.21% rally
• % Rally:  61.3%

1st March-1st April

• 0.69% rally
• % Rally:  61.3%

BUT….

The statistics above captures specific timepoints rather than intra-highs and intra-lows within that period. So, it is possible that the market may peak between the time points measured  and therefore record negative returns  by the timepoints measured (refer to example below).

example:

Peak in 10 March: at +10% from 1st March

But by 1st April, markets pull back to record +2% from 1st March

So if one were to measure (as we did above) from 1st March to 1st April, we still recorded +2% rally, BUT we missed the 8% decline between 10 March to 1 April.

roulette-screen

Unfortunately, our analysis was not designed to capture this. If there is a statistician amongst our readers who wish to further analyse the data, please email us for the excel data.

—————————————————

For those who trade on shorter time frames +/- 5 days from Christmas, we found an article by Dr Kris on seekingalpha (phew! that saved us another 30 minutes of analysis) - the results are detailed below:

Santa Christmas Rally Statistics: X-4 to X+6 (X= Christmas Day) by Dr Kris

Last Thursday’s blog was devoted to the Santa Claus rally characterized by a year-end surge in stock prices. We saw that there does indeed seem to be a rally in stocks just before Christmas so I thought that I’d research this phenomenon further over the weekend in between my holiday cookie baking marathon.

Evidence for a Christmas rally…

Using daily opening and closing prices for the past 15 years on the S&P 500 (which was as far back I was able to go), I was able to generate the following tables. Table 1 shows the price percentage gain or loss for the four trading days before Christmas Day (X-4 to X-1) and for the next six to seven days following it. Most years had four trading days in between Christmas and New Year’s except for 1993 and 1999 which had five and is the reason those two years have an extra data point. You can see from the table that there does seem to be a statistically significant rally for the two to three days prior to Christmas with the second to last day (X-2) outperforming the others and at lower risk (risk is given by the standard deviation).

santa_clause_rally_table

Table 2 summarizes several year-end trading strategies. You can see that the market rallies 80% of the time for the three days before Christmas, gaining on average 0.64%. Even better is holding onto this position and riding it out until the close of the second trading day after Christmas (from X-3 to X+2). Here, the average gain increases to 1.12% and at lower risk to boot. Nice!

…but little evidence for a New Year’s rally

These tables also show that as New Year’s approaches, the number of days closing in positive territory decreases. It’s reasonable to expect the last trading day of the year (X+4 in most years and X+5 in 1999 & 1993) to be down since that’s when most investors and fund managers exit the last of their losing positions. The first trading day of the New Year (N+1 in Table 2) is generally lackluster — possibly due to the hangover effect? But the day after that is a barn-burner, up over 0.5% on average nearly three-quarters of the time.

Conclusions

Although there’s quite a bit of noise to these data, the fact that the market does rally over the Christmas holiday 87% of the time (only two down years in the past 15) is statistically significant. The best way to play it would be to enter a long position (S&P futures, index options or the SPY tracking stock) on the third or second trading day before Christmas with the intention of exiting near the close of the second trading day after Christmas. It may not be the perfect holiday gift but it’s a lot better than a lump of coal in your stocking!