Santa Claus Rally
The Santa Claus rally has arrived. This sudden surge in the price of stocks often materializes in the last week of December, then extends through the first two trading days in January, kick starting the January Effect.
We’ve heard many explanations for the Santa Claus Rally throughout our 30 years of trading the markets, though most include tax considerations and people investing their Christmas bonuses.
To top it off. many investors are usually on vacation this week. Add a bit of pessimism, or contrarian thinking and shorts are forced to cover.
Finally, we must also consider the Santa Claus rally to be a result of investing in equities in anticipation of the usual rise in stock prices during the month of January, otherwise known as the January Effect.
SPX finished the trading session above the 20% mark on Thursday, so any close above that level will set the markets up for the January effect.
Note the periods of consolidation prior to breakouts and consider SPX in year 5 of the current secular bull market. If 2018 is anything like 1954 or 1986, this secular bull has a few years to run.
“So goes January, so goes the year,” first mentioned by Yale Hirsch in 1972 in the Stock Trader’s Almanac
If the last few weeks are any indication, energy stocks will continue to outperform and healthcare will find its legs. Financials took a breather over the past week, so anticipate the return of big banks once yields are figured in.
Small caps will benefit handsomely from the tax law overhaul, as will most stocks once analysts get back from vacation and begin adjusting estimates.
No matter how you gauge the Santa Claus Rally and subsequent January Effect, 2017 will go down as a banner year for stock traders.
Happy New Year,
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PS: the stock market looks nothing like 2000 or 2007.
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