Key takeaways
The Santa Claus rally describes a historical trend where there will be a slight rise in the stock market over the last five trading days of December and the first two trading days of January.
The seven-day combo yielded positive returns for nearly 78% of the time from 1950 to 2019
What causes this rally exactly is still unknown — possible explanations include optimism fueled by the holiday spirit andincreasing investor purchases in anticipation of the January effect
Understanding the Santa Claus rally
The Santa Claus rally was first recorded by Yale Hirsch in his Stock Trader's Almanac in 1972.
A Santa Claus rally is a historical trend in the market that involves a slight rise in stock prices during the last 5 trading days in December and the first 2 trading days in the following January.
Even though historical data give us a clue, it's important to remember that past performance is no guarantee of future returns.
What causes a Santa Claus rally?
There is no generally accepted explanation for the phenomenon.
The rally is sometimes attributed to the following:
Investors invest with holiday bonuses;
Increased investor purchases in anticipation of the January effect;
Optimism fueled by the holiday spirit;
The lighter market volume during vocation makes it easier to move the market higher;
A slowdown in tax-loss harvesting that depresses prices at the beginning of December.
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