Take other factors into consideration when making decisions this festive period.
It’s been a rough year. Markets are back to where they began in 2017. The NSE 20 share has shed more than 1,000 points from its peak in March. Year to date, stocks have shed over 22 percent of their value to 2,799.
Year to June, 70 percent of the stock brokers were already in the red, 30 percent of investment bankers and advisers had also booked losses and industry revenues had dropped by eight percent, according to Capital Markets Soundness Report Volume 8.
But this is December; should we hope on Santa Claus coming to town? Should we wish for a “Santa Claus Rally” — when stock market rallies during December, usually, in the last three weeks of the month — to rescue stocks? Most certainly.
“He” might give us a chance to recover from quite a beating this year. And since nothing else appears able to stem the market’s carnage, why not bet on Him. Big question is; has Santa delivered in the past?
To illustrate, consider last year. The NSE 20 share closed at 3,695 on the 21st of December 2017 before Christmas day, and between then and the end of 2017 its highest close was 3,712 — 0.5 percent higher.
That represents the maximum rally potential for the Santa Claus Rally period for a trader with perfect timing. Let’s analyse the previous nine years.
In 2016, the market rallied 1.5 percent to close at 3,084 points. Similarly, in 2015, 2014, 2013 and 2012, shares rallied 0.96 percent, four percent, 0.72 percent and 0.6 percent respectively in the closing days of these years.
Shares also pulled up two percent, 0.45 percent, 1.1 percent and 5.3 percent in the 2011, 2010, 2009 and 2008 (market remained closed on the 31st but opened in January 2 2009) respectively. A 1.7 percent average one-month gain certainly is not mouth-watering but nonetheless proves the theory works.
Why does the theory work? In 2016, FINRA, citing research from the Journal of Financial Planning, highlighted that the holiday cheer tends to put investors in an optimistic mood, and their optimism often causes them to be bullish on stocks.
The same study also indicates that businesses and governments may be less likely to release bad news during this period, another factor that may spur investor optimism.
More interestingly still, the study also found patterns of Santa Claus rallies in Asian countries (Japan, Singapore, Indonesia and Taiwan) with small Christian populations, and thus limited Christmas celebrations.
Bargain-hunters are also cited as one of the reason why stock push upwards during this season.
What’s also interesting, since 1950, according to Jeffery Hirsch’s book: The Stock Trader’s Almanac, the S&P 500 index has delivered an average return of 1.4 percent during this period — notice how the figure is close to what NSE 20 share index has generated in the last decade.
Will Santa Claus come to NSE this time? It’s highly probable. However, there’s no guarantee the market will follow a similar path this time around. Investors must take other factors into consideration when making investment decisions.
Focusing on the absence (or presence) of a Santa Claus rally is over-simplifying the markets.
That said, for those investing this holiday season, Santa Claus could have a gift for you. Happy Holidays.
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Note: The results are not exact but very close to the actual.
