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The new year is already catching investors on the back foot. After ripping higher in the final months of 2023, the S&P 500 (^GSPC) just notched its third straight day of declines for a total loss of 1.64% — the worst such three-day stretch since October.
Flying under the radar (no pun intended), the window for the Santa Claus Rally just closed as well — and the results don't bode well for stocks in 2024. For the uninitiated, please suspend disbelief for the next few paragraphs.
In 1972, Yale Hirsch discovered that stocks tend to rally over the final five trading days of the year plus the first two days of the new year. The Santa Claus Rally indicator was born.
Investors tend to get rewarded with an average 1.3% gain over these days nearly 80% of the time. But the true value lies in its predictive power — hence the term "indicator."
Jeff Hirsch continued the work of his father in the Stock Trader's Almanac, and he looked at three January-based indicators to handicap the odds of the entire year ending green.
In addition to Santa's namesake, there's the First Five Days indicator. As the name suggests, it represents the return over the first five trading days of the year. Another indicator called the January Barometer includes the return over the entire month.
"When all three are positive, as was the case in 2019, the next eleven months have been up 87.1% of the time with an average gain of 12.3%, and the full year advanced 90.3% of the time with an average S&P 500 gain of 17.5%," wrote Hirsch.
It's worthwhile to back up 12 months and recall the results from last year's suite of January tells. On Jan. 4, 2023, the S&P 500 was up 0.9% over the Santa window. A few days later, the First Five Days had returned 1.4%. By the end of January, the world's benchmark was 6.2% in the green.
The so-called January Trifecta might have been screaming green last year. But after getting pummeled with the worst returns for a 60/40 portfolio in a century, many investors were otherwise occupied.
Investors wondering what might lie in store for 2024 can look to the words of Yale writing five decades ago: "If Santa Claus should fail to call, bears may come to Broad and Wall"
Ryan Detrick of Carson Research summarized the recent price action on X.
"Stock didn't rally during one of the most bullish 7-day periods of the year. Santa didn't come this year, which could be a near-term warning. After a 9-week win streak, we were probably due for a break at anytime. Still, the past 5 times [Santa] didn't come also saw a red January."
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