Is the Santa Claus Rally Real?

Most traders and investors have probably heard of the Santa Claus Rally. This refers to the belief that the market usually posts gains in the trading week following Christmas. Some people extend the Santa Claus Rally to include the full month of December. Yet before we start putting our hard-earned money on long positions based on market legend, let’s take a closer look at how the market actually trades in December. In other words, let’s see if the Santa Claus Rally actually real.

The Broad Market Indexes

Let’s first consider the Dow Jones Industrial Average. Over the last ten years, the index actually does average a gain of 0.7% in December. The index also averages a gain of almost 1% the week after Christmas. The S&P 500 also shows gains in those periods, though slightly lower than the Dow. The NASDAQ Composite Index doesn’t typically perform as well as the other indexes in December, but it shows slightly higher gains the week after Christmas.

The Industry Sectors

So the market does actually show gains in the month of December as well as the week after Christmas. Then there must be some industries that are leading the charge. We took a look at the major industry sectors to see if which ones were the strongest and weakest in December.

This table shows the average December gains for each industry sector. The Financial Sector is far and away the strongest December sector as it has averaged a gain of over 1%. In fact, most of the other sectors show that they are basically flat for the month. But we also see that the Energy Sector and the Oil and Gas Exploration Sector are typically weak in December. So while the broad market may average a gain December, the Financial Sector seems to be the major contributor to these gains.

Individual Stocks

So what about individual stocks? We looked at the average December gains or losses of some of most commonly traded stocks to see how they performed.

It shouldn’t come as a surprise that Bank of America and JP Morgan have strong Decembers, as they are in the Financial Sector. However, we were surprised to see that Walmart, Apple and Amazon typically underperform in December. You would think that these stocks would benefit from the Christmas holiday, but at least on average, that isn’t the case.

This information is far from a guarantee for December gains for Bank of America, the major indexes and the Financial Sector. But it is good to know that the market does usually post gains in December as well as the week after Christmas. While we have yet to see hard evidence that Santa Claus himself exists, we can say that the legend of the Santa Claus Rally is actually true.

Jeff Drake
True Edge Trading