Specializes in pattern recognition and trading systems development. He founded Seasonax and publishes the website www.SeasonalCharts.com , which features free-of-charge seasonal charts for interested investors. In his book The Gold Cartel (published by Palgrave Macmillan, see link on the right hand side), Dimitri discusses gold price manipulation and modern-day credit excess.
Every year a certain stock market phenomenon is said to recur, anticipated with excitement by investors: the Santa Claus rally. It is held that stock prices typically rise quite frequently and particularly strongly just before the turn of the year.
Unbeknown to many, Santa Claus paid a high price for enriching investors [PT]
I want to show you the Santa Claus rally in the German DAX Index as an example. Price moves are often exaggerated in the German stock market, which leads to quite pronounced – and hence profitable – seasonal trends.
The chart below is not a standard chart that depicts a price trend over a specific time period. Rather, this seasonal chart shows the typical seasonal pattern of the German DAX Index. It illustrates the average returns generated by the index in the course of a year over the past 20 years. The horizontal axis shows the time of the year, the vertical axis shows the price information indexed to 100.
DAX, seasonal pattern over the past 20 years. The Santa Claus rally lies immediately ahead
The positive seasonal period near the end of the year is highlighted in dark blue on the chart. The Santa Claus rally in the DAX Index begins on December 13 and typically lasts until January 02 of the next year.
The average return achieved in the time period from December 13 to January 02 amounted to 3.66 percent. This gain was generated in just 19 calendar days.
Thus the Santa Claus rally on average generated an annualized gain of 99.62 percent!
For comparison: in the rest of the time the annualized gain of the DAX amounted to just 1.86 percent.
In short, the seasonal trend around the Christmas holidays is quite extraordinary.
This raises the question whether this is a robust result or if it is a statistical artifact attributable to a few outliers. Let us take a closer look at the individual years underlying the pattern.
The following bar chart shows how prices behaved in the time period from December 13 to January 02 in every year since 1997. Green bars indicate years generating gains, red bars indicate years in which losses occurred.
DAX, percentage return achieved between 13. Dec. and 02 Jan. in individual years since 1997. Most of the time the DAX rises at the end of the year.
As the breakdown illustrates, the green bars clearly dominate both in frequency and extent. The Santa Claus rally took place in 18 of the past 20 years, with the largest gain amounting to 16.13 percent (achieved in 1998). By contrast, there were just 2 years in which the Santa Claus rally failed to happen. The largest loss was recorded in 2000 and amounted to 4.99 percent.
In other words, individual outliers are not responsible for generating the market’s strength close to the end of the year. In fact, the pattern is quite stable from a statistical perspective. What causes the market’s strength at the end of the year though?
One often cited reason for the stock market rally at the end of the year is window dressing by investment funds – i.e., investment funds support prices at year-end in order to prettify their results – which has the purely coincidental side-effect of boosting bonus payments, which are often calculated at the turn of the year.
The real reason for the Santa Claus rally… it’s just a little extra for the “folks back home”. [PT]
Less obvious, often psychological reasons, are probably more a important factor though. These include the fact that people often take stock at the end of the year and position themselves for the new year. In addition, there is the statistically significant holiday effect, which demonstrably tends to lead to rallies on occasion of other holidays as well. During Christmas time the strong desire to buy things (such as presents) appears to be spilling over into the stock market as well.
Christmas is after all a time of giving. So perhaps it should be no surprise that the stock market is often rewarding investors generously at this time of the year.
If you want to find out how pronounced the Santa Claus rally in your favorite market instruments is, visit my free-of-charge website www.seasonalcharts.com or call up the Seasonax app on your Bloomberg terminal or in Thomson-Reuters Eikon. As an aside: there are never any guarantees in the markets, but you can certainly let the probabilities work in your favor!
PS: Treat yourself to a present with the seasonal patterns in the stock market!
Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com, which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix method in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange. For in-depth information on the Seasonax app click here (n.b.: subscriptions through Acting Man qualify for a special discount! Details available on request).
Charts by Seasonax
Image captions by PT
Left: How Santa got into the business; right: Santa and the boys arrive on Wall Street