Kaeppel's Corner: Turkeys Brace for Tough Week

One of the things that I am always thankful for during Thanksgiving week is that it is Thanksgiving week. While that may sound like a bit of circular logic, I assure you that I have something far more altruistic – okay, make that capitalistic – in mind. For you see, while Christmas is over a month away (although you wouldn’t know it walking through the pyrotechnics lighting the nearby mall), Santa Claus is already on his way (disclaimer: or as you will soon see, there is at least about an 80% historical probability that he is on his way). Perhaps I should explain. So here goes:

As I measure it, the “Santa Claus Rally” starts two trading days before Thanksgiving and ends at the close of the fifth trading day of January. Now that sounds a little bit crazy I’ll admit. But all I can suggest is that you judge for yourself. Chart 1 displays the growth of $1,000 invested in the Dow only during this timeframe every year since 12/31/1933.

Chart 1 – Growth of $1,000 invested in Dow two trading days before Thanksgiving through trading Day 5 of the following January since 12/31/1933

As you can see in Chart 1, Santa Claus does indeed have a tendency to visit Broad and Wall on a fairly consistent basis. Of course, as with any other seasonal trend, it is important to note that the market does not always advance during this timeframe every single year. Still, the long-term upward trend depicted in Chart 1 is fairly unmistakable.

A few fun facts to know and tell regarding the Santa Claus Rally: 

• The average daily gain during the Santa Claus rally was +0.0009038%.
• The average daily gain during all other trading days of the year was +0.000213%.
• The annualized rate-of-return during the Santa Claus rally was +25.5%.
• The annualized rate-of-return during all other trading days was +5.5%.
• The Santa Claus Rally period has showed a gain in 59 of the past 73 years, or 80.8% of the time.
• The average performance for the Santa Claus Rally as we have defined it here has been a gain of +2.92%.
• The biggest gain was +13.3% and occurred during 1971-1972.
• The worst loss was –6.2% and occurred during 1977-1978.
• The average gain during the 59 “up” periods was+4.1%.
• The average loss during the 14 “down” periods was –2.0%.

   

  Chart 2 through 5 display the action of the Dow during the “Santa Claus Rally” over the past four years.

   

   

  Chart 2 – Santa Claus Rally (2006-2007)

   

   

   

  Chart 3 – Santa Claus Rally (2005-2006)

   

   

   

   

   

  Chart 4 – Santa Claus Rally (2004-2005)

   

   

   

  Chart 5 – Santa Claus Rally (2003-2004)

  Longer-term traders might consider buying and holding an index fund – or possibly a leveraged index fund or ETF – for the duration. Other shorter-term traders might consider using up ticks in the 3-day RSI as potential opportunities to play the long side of the market during this favorable period.

  Summary

  
  So does any of this guarantee that all will be “merry and bright” between now and the fifth trading day of January 2008?  Sorry, folks. It doesn’t work that way. Still, history suggests that investors might be wise to give the bullish case the benefit of the doubt over the next roughly five weeks.

  Because remember – you are not and a turkey. And Santa is on his way (at least I’m 80.8% sure he is…).

  Happy Thanksgiving!

  To search for previous articles written by Jay Kaeppel, please click here.

  Jay Kaeppel
  Staff Writer and Trading Strategist
  Optionetics.com ~ Your Options Education Site