Here’s why Santa may not deliver stock gains

Did the stock market get ahead of itself?

It’s an important question, now that the Dow Jones Industrial Average DJIA, +0.36% has topped 18,000 for the first time. Unfortunately, there is reason to think it has.

Consider the stock market’s performance between Christmas and New Year’s, which historically is one of the best weeks. This is the period in which the real “Santa Claus” rally is supposed to materialize (as opposed to every other rally in November or December to which sloppy commentators give the name).

When Dow from Dec. 1 until Christmas … Dow’s average gain between                   Percentage of time the Dow rises
Christmas and New Year’s                    between Christmas and New Year’s
Raisis                                                                                                 0.51%                                                 70%
Falls                                                                                                   2.02%                                                 50%

It turns out that Santa is markedly less likely to make an appearance whenever the stock market — like this year — has been especially strong in December prior to Christmas. The accompanying table reflects the average Christmas to New Year’s performance of the Dow Jones Industrial Average over all years since it was created in the late 1800s.

As you can see, the odds that the market will rise over the next week are a lot lower whenever the stock market has risen during the December sessions prior to Christmas. The differences reported in this table are significant at the 95% confidence level that statisticians often use to determine whether a pattern is genuine.

It’s also worth noting that this pattern has grown stronger in recent years. Between Christmas and New Year’s over the past 20 years, the Dow has declined by 0.1% whenever its pre-Christmas December performance has been positive. That contrasts with a 1.9% gain in those years in which the Dow went down over this pre-Christmas period.

To be sure, these data are averages, and there are individual years that don’t live up to the pattern. Last year’s December was one of them, in fact: The Dow rose over the period prior to Christmas and between then and New Year’s.

Nevertheless, since last year is the exception rather than the rule, don’t be surprised if the stock market’s performance over the coming week is less spectacular than it’s been in recent sessions.

 Varchev Traders

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