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Bullish Trading Ahead of Christmas: Small-Caps Lead

Everyone is anticipating the Santa Claus Rally, but that doesn’t start until next Monday, 12/27. The Santa Claus Rally was defined by Yale Hirsch in 1972 in the Stock Trader’s Almanac as the last five trading days of the year and the first two trading days of the New Year. This short, sweet rally is usually good for about 1.3% on the S&P 500, but the real significance of the SCR is as an indicator.

It is our first seasonal indicator of the year ahead. Years when there was no Santa Claus Rally tended to precede bear markets or times when stocks hit significantly lower prices later in the year. As Yale’s famous line states (2021 Almanac page 116 and 2022 Almanac page 118): “If Santa Claus Should Fail To Call, Bears May Come to Broad and Wall.”

For decades we have been tracking the market’s performance around holidays in the annual Stock Trader’s Almanac. In the 55thedition for 2022, data for DJIA, S&P 500, NASDAQ and Russell 2000 can be found on page 100. Of the eight holidays tracked, Christmas has been one of the most consistently bullish with respectable average gains occurring two days before and the day before.

Tomorrow, Wednesday 12/22, two days before Christmas, has been more bullish over the past 33 years with greater average gains and a greater number of advances. Small caps measured by Russell 2000 have enjoyed the most consistent strength on both days. Volatility also tends to be subdued ahead of Christmas as well. Prior to 2018’s pre-holiday selloff, the worst decline recorded by any of the four indexes on either day was 1.63% by DJIA in 1997.

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