You have probably already heard about the Christmas rally.
It is one of the most popular seasonal patterns, and lasts from mid-December to early January.
It is in fact one of the most profitable seasonal patterns for the entire stock market. Moreover, it has been around for many years. Therefore there seems to be solid ground for its good reputation. The probability of a positive movement at the end of the year is very high.
But when exactly does the Christmas rally begin? How often does it occur; and how profitable is it actually?
The S&P 500 under the seasonal magnifying glass
This first chart shows you the seasonal trend of the S&P 500. Unlike usual charts, it does not show the price over a certain period of time, but the average trend of returns over 25 years depending on the season.
The horizontal axis of the chart shows the time of the year, while the vertical axis shows price information. So you can see the seasonal trend in the seasonal chart at a glance.
S&P 500, seasonal trend, determined over 25 years
Noticeably there are several good seasonal phases in the US stock market. In the weeks up to the beginning of May prices rise, followed by a weak phase that sets in with “Sell in May and go away”. Then there is the fall rally, which is interrupted at the beginning of December, and then the Christmas rally marked with the arrow.
Long-term seasonality on the US stock market
Now look at the seasonal pattern of the U.S. stock market over the very long period of 125 years.
Dow Jones, seasonal trend, determined over 125 years
You can see that the Christmas rally is also very impressive in the long-term view.
The fact that the Christmas rally could exist over such a long period speaks for its stability.
The Christmas Rally is a true Christmas gift!
Let’s look at the Christmas rally in detail. According to the past 25 years, I have set its beginning on December 14, with its end on January 3 (in the long-term view, the Christmas rally often began and ended a few days later).
The study over 125 years shows that the seasonal phase for Dow Jones between the December 14 and January 3 was positive in 88 cases, the majority of years.
The average increase was 1.52%, with the Dow Jones rising an average of 5.52% per year over the 125 years. The Christmas rally thus generated more than a quarter of the total annual gain in just 12 trading days – a true Christmas present!
The annualized gain during this time of year was 34.24% on average, but only 4.09% during the rest of the year. This also shows you the strength of this seasonal pattern.
Now consider the distribution. The bar chart shows you, for all years since 1897, the return of the Dow Jones between that of December 14 and January 3. In blue you see the years in which there were gains, in red the years in which there was a loss.
Dow Jones, return in percent between Dec. 14 and Jan. 3, in individual years since 1897
The distribution of positive bars is fairly even. The Christmas rally is therefore clustered and fairly evenly distributed over the entire period under review.
It is therefore neither a recent phenomenon nor an outdated myth, but a true classic.
The reasons for the Christmas rally
Window dressing at the end of the year is often discussed as the reason for Christmas rallies. That is probably one of the reasons.
However, I think there are also emotional reasons for the Christmas rally. For example, the mood around Christmas tends to be festive. Thanks to gift purchasing most people are in a buying mood, which is transmitted to stocks.
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Founder and Chief Analyst of Seasonax
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