Ho-Ho-Hoping for the best: Is a Santa Claus Rally in the cards for 2022?

8 November 2022 Amega

The Yuletide season is fast approaching, and while many households have already begun their Christmas shopping, investors are clenching their fists in anticipation of a different kind of gift: The hope for a Santa Claus rally in the stock market.

But what exactly is a “Santa Claus rally”, and how likely are we to see one this year?

In simple words, “Santa Claus rally” is a term that describes the tendency of the stock market to experience a sustained rise during the Christmas period, usually either during the weeks leading up to the holiday or the week after, all the way up to the 2nd of January. Other popular terms for the phenomenon are “The December effect” and  “Turn-of-year effect.”

The prevailing theories behind the “Santa Claus rally” phenomenon,  are increased holiday shopping, an (often misplaced) optimism due to the seasonal spirit, and a lack of institutional investors, who tend to be more pessimistic than their counterparts, which theoretically can lead to a bullish trend in the markets.

Some of the most popular strategies to take advantage of a potential Santa rally, include buying on the first of the last five days of the year and then closing your position at the close of the second day of the New year. This, however, poses a problem with risk management, as it is unclear where you should place your stop-loss. Although historically, the period indicates an average gain of 1.5%, it is not unlikely to experience sudden and impactful drops on certain occasions.

To counter this, some traders prefer looking at the seven-day period of the Santa Rally on lower timeframes, using day-trading strategies instead to identify patterns of a bullish price action or technical indicators to enter the market with a buy position during periods that historically tend to have more buyers than sellers.

As for which are the best stocks to keep an eye on for the Santa Claus rally, investors usually look for companies with significant gains and a history of bullish trends during the period.

But how likely are we to see a Santa Claus rally in stock markets this year? Well, the data so far is, to say the least, conflicted.

On the one hand, during the recent FED meeting, the Federal Reserve announced another 75 basis-point interest rate hike, the fourth in a row so far. A hike in interest rates is likely to lead to a decline in the stock market, despite recent positive earning reports, making a “Santa Claus rally 2022” look more like a pipe dream.

On the other hand, the upcoming mid-term elections could spark a Santa Claus rally which, according to Yardeni Research, could extend well into next year, as mid-term elections have consistently been bullish, according to historical data.

Further support for the possibility of a Santa Claus rally, comes from the recent data on major company buybacks (companies buying back their own stock).

Recent data shows that major US companies are increasing their buybacks around this season. According to Bloomberg, by the end of 2022, corporate buybacks are expected to reach up to 5 billion USD per day.

It is worth mentioning that Apple can now boast the biggest buyback in its history after the corporate giant bought back almost 90 billion USD worth of its shares, in the fiscal 2022 period, which ended in September. This has led to a bullish market as more people tend to invest in companies that perform major buybacks.

Whether a Santa Claus Rally will happen this year is still up in the air. Data suggest a 50 to (slightly over) 60% possibility for it to happen, but those are not exactly odds one could sink his teeth in.

In any case, being prepared has never hurt anyone, so remember that everyone can take advantage of some of the best market conditions available and trade on a potential Santa Claus Rally with Amega!

By Mario M. Plousiou

Amega

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