Warning! Bad weather at the North Pole could disrupt Santa’s trip to Wall Street.
As the end of the year approaches, you’ll likely hear the term “Santa Claus Rally” a lot. But what exactly is it and how can traders and investors benefit from it?
What is Santa Claus Rally?
According to the The Stock Trader’s Almanac, the Santa Claus rally is a short, sweet, and respectable rally that takes place within the last five trading days of the year and the first two trading days of the following year. And it happens almost every year. But let’s face it; The December 2022 stock market performance has been dismal and does not offer much hope for an eventual rally. Many investors are wondering if Santa might have a hard time leaving the North Pole.
However, anything is possible in the markets.
Why is the Santa Claus Rally taking place? One theory is that investors sell their losing positions at the end of the year to take advantage of tax losses. With the money raised from the stock sales, investors are turning around and buying stocks hoping for returns. Another theory says it has to do with the general optimism associated with the start of a new year.
The broader US markets are at a critical juncture and could go either way. The S&P 500 Index ($SPX) is at a 38.2% Fibonacci retracement level. A break below could take it to the October lows or even below. The Dow Jones Industrial Average ($INDU) is at its 50-day moving average. If $INDU falls below the MA, it could go much lower. And the Nasdaq Composite ($COMPQ) continues to struggle. It’s been a pretty ugly time for tech stocks, so even a brief rally could be a nice gift.
An interesting pattern is developing in $COMPQ (see below). Check out a weekly chart (at your own risk) to see how far $COMPQ could fall. Due to the risk of spoiling our vacation and the optimism surrounding the new year, we have refrained from publishing the weekly chart here.
CHART 1: NASDAQ COMPOSITE AT A CRITICAL LEVEL. A break below 10,350 could mean the index will fall further. But if these levels hold, there could still be a Santa Claus rally. Chart source: StockChartsACP. For illustration only.
When Santa Claus shows up…
If the critical levels in the broader indices hold and the markets see the near-term rally, you may want to take advantage of some trading opportunities. Here’s a way:
- Login to your StockCharts platform and then select your dashboard to get an overview of the market as a whole.
- Scroll down to Sector Summary in your Member Tools section (you can find it under overview pages).
- Select the top performing sector and drill down until you find a stock or exchange traded fund that fits your trading criteria.
- Look at the chart and if your technical indicators confirm upward movement, you could enter a short-term trade. But things could go in the opposite direction, so be careful when applying stop losses.
Although the odds of a Santa Claus rally are high, it’s not a sure thing. If you happen to be trading during the holiday season, keep an eye on these critical levels in the broader indices. When Santa Claus shows up on Wall Street, remember that the rally is short-lived.
When Santa isn’t calling, bears can come to Broad and Wall. — The Stock Trader’s Almanac
Jayanthi Gopalakrishnan
Director, Website Content
StockCharts.com
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation or without consulting a financial professional.
Happy charting!
Jayanthi Gopalakrishnan is Director of Site Content at StockCharts.com. She spends her time creating content strategies, providing content to educate traders and investors, and finding ways to make technical analysis fun. Jayanthi was Managing Editor at T3 Custom, a content marketing agency for financial brands. Prior to that, she was senior editor of Technical Analysis of Stocks & Commodities magazine for over 15 years.
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