Of all the year-end indicators out there, the Santa Claus rally is perhaps the most misunderstood, says Jeff Hirsch, editor in chief of the Stock Trader's Almanac. "People use the phrase sort of loosely for any sort of year end rally," he explains in the attached video, when in fact, its parameters and indicators are quite precise.
"The Santa Claus rally, as defined by the Stock Trader's Almanac and Yale Hirsch who created it (in 1972), is the last five trading days of the year plus the first two of the New Year," Hirsch says, acknowledging that this particular indicator is often confused with the January Barometer.
In addition, the Santa Claus rally has a dual mandate, so to speak, as it marks an above average chance that this period will be positive, and it is also an indicator for the year to come.
As Hirsch conveys, since 1950, the S&P 500 has averaged 1.5% gains for that 7-day window. "Not a big gain, but a nice little positive," is how he describes it. "There's this general buying bias by the pros at the end of the year after tax-loss selling."
That said, the real magic of Santa Claus is the broader message, as Hirsch explains, citing this little jingle coined by his father: "If Santa clause should fail to call, bears may come to Broad and Wall."
What that means is that if the 7 days of trading that end on Thursday January 3rd is negative, it does not bode well for the coming year.
"What's important is not to catch this little rally but to use it as indication for what may happen in the coming year," he says, calling it "an early indicator for the year to come."