December: "If Santa fails to call…"

November 30, 2015 09:00 AM

December has been the best performance month for the S&P 500 and second best for the Dow Jones Index since 1950, averaging 1.7% on each. It’s also the top Russell 2000 (1979) month and second best for the Nasdaq Composite (1971). Rarely does the market fall sharply in December. When it does it is usually a turning point following strong gains leading up to December.

Trading in December is holiday inspired and fueled by a buying bias. However, the first part of the month tends to be weaker as tax-loss selling and year-end portfolio restructuring begins. December is laden with seasonality and important events. 

Small caps tend to outperform larger caps near the middle of the month and our “Free Lunch” strategy is served from the offerings of stocks making new 52-week lows on triple-witching Friday. The “Santa Claus Rally” begins on Christmas Eve and ends on the second trading day of 2016. The S&P 500 has averaged 1.5% over this stretch since 1969. 

This is the first indicator for the New Year. Years when the Santa Claus Rally has failed are often flat or down. The last four times it has not occurred were followed by two flat years (1994 and 2004) and two nasty bear markets (2000 and 2008). As Yale Hirsch’s famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”

December triple-witching week is more favorable to the S&P 500 with Monday up 10 of the last 15 years while triple-witching Friday is up 24 of the last 33 years with an average 0.4% gain. The entire week has logged gains 25 times in the last 31 years. The week after December triple-witching is the best of all post triple-witching weeks for the Dow and is the only one with a clear bullish bias, up 23 of the last 33 years. Small caps shine with a string of bullish days from Dec. 17 to Dec. 28.

Trading the day before and after Christmas is generally bullish across the board with the greatest gains coming from the day before (Dow up seven of the last eight). On the last trading day of the year, Nasdaq has been down 12 of the last 15 after having been up 29 years in a row (1971-1999). The Dow and S&P 500 also have exhibited a bearish bias during the last 21 years. The Russell 2000’s record closely resembles Nasdaq’s with gains from 1979 to 1999 and only four advances since.

About the Author

Christopher Mistal is the director of research for stocktradersalmanac.com, which identifies market opportunities based upon historical patterns and market seasonality in conjunction with fundamental and technical analysis. 
@AlmanacTrader