The clock has officially begun on a potential year-end Santa Claus Rally for the stock market.
A Santa Claus Rally is one where stocks climb higher in the final five trading sessions of a year plus the first two trading days of the New Year. Its precise cause has never been greatly explained — theories range from year-end tax considerations to people spending their fat bonuses to buy stocks to general seasonal effects.
Wednesday is the first day in this nine session trek for the markets. And so far so good in the trip — stocks rose across the board through midday trading as investors digested hopeful news on the Omicron variant potentially peaking in South Africa.
While a Santa Claus Rally will be hard to pull off in the current volatile pandemic climate, the long-term data does suggest there are strong, powerful seasonal forces at play that could ultimately win out.
Over the past 92 years, the S&P 500 gained 77% of the time during the Santa Claus Rally period points out Sundial Capital Research. The average gain in this seven-day trading period tallied 2.66%.
The largest Santa Claus Rally in the data set came in 1991-1992, where the S&P 500 rocketed 9.6%. Meanwhile, the largest down period happened in 1931-1932 as the S&P 500 shed 7.24%.
"A 77% win rate should not be confused with a 100% win rate, and traders considering playing the Santa Claus Rally must be aware of the risk of loss. On the more optimistic side, beyond the -7.24% loss during 1931-1932, the worst loss was just -2.78% in 1968-1969," cautions the team at Sundial Capital Research.
Correction: The year-end Santa Claus Rally is when stocks climb higher in the final five trading sessions of a year, plus the first two trading days of the new year. The number of days was misstated in an earlier version of this article.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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