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Santa Claus Rally (one) definition (Dec. 2014/15)

Santa Claus Rally (one) definition

The stock market rallies at some point during December. This is the most commonly used definition, and the least precise... (DJIA - EMA-"Melange"), last quarterabove the daily updated EMA-"Melange" of the last quarter (Dow Jones Industrial Average)

And, without such precision, it is somehow pointless. (BUT) after all, the stock market rallies during every month of the year. One could just as easily talk about an Easter Bunny Rally — or talk about a Santa Claus Decline, since the stock market inevitably falls at some point near the end of the year.

Might this vague definition of the Santa Claus Rally nevertheless be on to something? Might the stock market during December stage a more powerful rally than in other months?

To find out, M. Hulbert analyzed the Dow Jones Industrial Average DJIA back to 1896, when it was created. For each December since then, he calculated the maximum gain one could have realized by buying at the optimal Dow closing low and selling at its highest subsequent close (Dataset 1896 up to Dec.-close 2013).

Note carefully that one couldn’t have actually realized this gain in the real world, since only in hindsight would you know these optimal points at which to get in and out of the market. But this reflects December’s rally potential.

Calculated in this way, this potential for December averages 4.80%. That’s not bad for a month’s work, since on an annualized basis it works out to 75.9%! (Dataset: 1896 - Dec.-close 2013)

Unfortunately, December is not unique in this regard. In fact, six other months have rally potentials that are larger than December’s. The average for all months works out to 4.82%, which is statistically indistinguishable from December’s.

So this definition of the Santa Claus Rally does not withstand historical scrutiny. If this is THE ONLY THING you have in mind when you refer to this seasonal pattern, don’t bet on it 100% ;-).

Anyway, apart from this reminder, that nothing is certain one can state, that the Dec. 2015-Low has been so far quoted on the 3rd Dec. 2015 @ around 17,250 points. A gain of ca. 4.8% as stated above would therefore lead to a Dec.-Close for 2015 of ca. 18,260 points in the DJIA (17,250 x 1.0482).

original text source/slightly adapted (Dec. 2014):