- A Santa Claus rally in the stock market could bring new highs to the major averages next week.
- The Santa Claus rally is a seven-day trading window that this year begins on December 22 and ends on January 3.
- Historically, shares are up 79% of the time during this trading window with an average gain of more than 1%.
The end-of-year rally that catapulted the Dow Jones Industrial Average and Nasdaq 100 to record levels earlier this week It is likely to extend into next week.
This is because the stock market has a strong tendency to rise during the last five business days of the year and the first two business days of the new year, which is commonly known as the Santa Claus rally.
The phenomenon was discovered in 1972 by Yale Hirsch, creator of the "Stock Trader's Almanac.". This year, Santa's shopping window begins on December 22 and ends on January 3.
According to historical data dating back to 1950, the S&P 500 has posted an average return of 1.3% and is positive 79% of the time during the Santa Claus trading window, according to data from Ryan Detrick of Carson Group.
According to Detrick, the period marks the strongest seven-day period in which stocks reliably rise and contributes to December being the best-performing month of the year for the stock market.
And when using stock market data going back to 1928, the average gain during the Santa Claus trading window is even higher: 1.6%, according to Bank of America data. If that kind of gain materializes this year, it would send the S&P 500 to new all-time highs.
"The Santa Claus rally is real," Bank of America technical analyst Stephen Suttmeier said in a note earlier this month. Suttmeier added that the next trading window is also bullish during the third year, heading into the fourth year of the presidential cycle.
"This period from late December, year three of the presidential cycle, to January, year four, is also bullish, with the S&P 500 rising 70% of the time with an average return of 0.90%," Suttmeier said.
But if a Santa Claus rally fails to materialize over the next week, seven trading days, it could serve as a warning sign to investors that next year could see a weak start for stocks.
In the last 30 years, all five times that stocks posted negative returns during the Santa Claus rally period, the month of January was increasingly lower for stocks.
"In particular, there were no Santa rallies in 2000 and 2008, not the best of times for investors and potentially some major warnings that something was not right. Finally, the full year was negative in 1994 and 2015 after no Santa Claus [Claus rally]"Detrick said.
Consequently, Hirsch coined the phrase: "If Santa doesn't call, the bears may come to Broad and Wall."
The New York Stock Exchange is located on the corner of Broad and Wall Streets.
