Santa Claus rally is a financial term which refers to the tendency of the stock market that has increased over the end of the year and throughout the first two trading days in the coming year.
Santa Claus rally is being a seasonal phenomenon. Looking back from 1969, the Santa Claus rally has occurred 34 times over the past 45 Christmas season which counted as more than two-thirds of the total holiday seasons. During these holiday seasons, the average cumulative return in the stock market is 1.4%. Some people may wonder whether the Santa Claus rally is happens to be a coincidence.
There are many theories exist that could explain why this is happening. In fact, people tend to buy stock during the end of the year to avoid the rise in stock price in January of the next year. Also, optimization toward value stocks also drives people conduct investment in stock market.
It seems that having Santa Claus rally in stock market is a good thing since it is possible to attract more investors to the stock market. However, there are also negative effects which caused by the Santa Claus rally as well. Now, let us take a look at the pros and cons of the Santa Claus rally.
-Pros & Cons
For people who are experts and always pay attention to stock market trends are more likely to benefit from a Santa Claus rally. People with such technique are usually being able to find patterns in order to determine a good entry and exit point.
For people who is new to the stock market, trading in the period during the holiday season is not recommended. Especially for buy and hold investors, investing during Santa Claus rally will not be beneficial in long run. A good strategy for these investors is to follow a long-term investment plan.