Was today’s rally a vision of what is to come into the New Year?

‘Ole St. Nick has an early deadline for the stock market, and if he doesn’t kick it into gear by Friday this may be the year without the proverbial stock market Santa Rally.

Much anticipation lies ahead for retail traders ranging from the unknown gifts under the Christmas tree to the unknown moves the market will make through the holidays.

Market tendencies are reason for seasonal rally

The potential for an annual Santa Rally is less about whimsical mysticism and more about seasonal tendencies in the stock market.

This end-of-year bounce is typically the last five trading days of December and the first two trading days in January. Buying activity tends to pick up across the market during this festive phase where people feel more optimistic about the future.

This seasonal rally has occurred about 75% of the time over the last 15 to 20 years. By the current calendar it should begin this Friday and continue until Jan. 4.

Traders should keep in mind that a Santa Rally is not a scheduled event on the Wall Street Yuletide calendar. This phenomenon is simply a year-end tendency among stock market participants.

“A lot of folks feel there is a very short-term, bullish optimism,” said Raghee Horner, Managing Director of Futures Trading at Simpler Trading, when explaining the seasonal event. “There are a lot of different things that are factored into this.”

Market enthusiasm cultivated by year-end portfolio adjustments, selling equities for tax purposes, or corporate holiday bonuses that lead to stock purchases can all be contributing factors to a Santa Rally.

“Lay in a certain amount of optimism… and it makes sense as to why we might see some strength at the end of the year,” Raghee said. “It’s a really high tendency.”

Will stock market rally continue into new year?

Was the rally today an early beginning of a Santa Rally this year?

The stock market spiked early today with the Dow jumping by more than 550 points in mid-morning trading. This was matched with buying that increased the S&P 500 by more than 1.6% at the time and more than 1.75% in the Nasdaq.

Even the Volatility Index (VIX) – or “fear” index – was more positive today, dropping by more than 5% to just above 20.

In the market today, the Dow closed at 33,376.48 points to gain 1.60% (adding 526.74 points on the day). The Nasdaq jumped to 10,709.37 points for a 1.54% increase while the S&P 500 joined the uptick by rising 1.49% to 3,878.44 points.

Only time will tell if this early gift to traders will continue as an extended rally into 2023.

No guarantee Santa Rally gets underway

With hopes rising for a Santa Rally to close out 2022, it might help traders to understand more about potential benefits of this stock market phenomenon.

Traders and investors can potentially benefit from a Santa Rally in different ways:

• Positive market sentiment – The holiday season typically builds optimism across stock market participants, which may increase buying activity.
• Year-end portfolio adjustments – Investors and traders may consider selling underperforming stocks in their portfolios and buy equities showing greater potential as a way to improve final returns for the year. Portfolio adjustments may increase demand for certain stocks and push prices higher.
• Tax considerations – Some investors and traders might sell stocks to realize capital losses that can be used to offset capital gains and reduce tax liability. This selling activity may increase into the end of the year as investors work to minimize tax burdens.
• Increased liquidity – Stock market liquidity tends to increase into the end of the year as investors and traders close out positions and prepare for the new year. Increased liquidity can fuel higher stock prices.

There is no guarantee that a Santa Rally will take place even if the above actions take place on a large scale because, as previously mentioned, a Santa Rally does not occur every year.

With any trades throughout the year, investors and traders should carefully consider the risks and potential rewards before making any decisions.

Don’t just depend on jolly ‘ole St. Nick to deliver the goods.

Believe or not, savvy traders don’t wait on Santa

The holiday season is intended to be a magical time of year on many levels.

For traders, depending on the holiday spirit to track and execute that next special setup isn’t a good plan. Any issues with trading plans this year need to be addressed before launching into the new year.

“There is nothing magical about January 1 which will make trading any different than it was on December 31,” said David Starr, Vice President of Quantitative Analysis at Simpler Trading.

This may seem counterintuitive coming from the man who created Voodoo Lines®.

“If your plan was working this year, then keep following it into the new year,” David said. “If your plan isn’t working it’s time for a tune-up.”

David is a real-life example of a professional trader who prepares his trading plan and checks it twice.

“All trading plans can use a good review now and again and even for plans which are working, once a year is a good frequency to do a detailed review of how different setups are performing and make any adjustments,” David said. “There’s no need to do this right at the new year.”

David shared that he completes an annual trading plan review every August, but some people get it done at the start of the new year.

“The important thing is to get it done,” said David.

As Santa watches over all the children this year, traders will be watching for a little end-of-year stock market enthusiasm to carry over into 2023.