Stock Trader's Almanac noted today that despite last year's significant rally in the stock market, the anticipated Santa Claus Rally has failed to materialize this year.
The market is displaying signs of weakness, with this week’s selling prompting caution among investors. Profit-taking in January has become more common in the last 25 years, especially in election years like 2024.
“Some profit taking is understandable following the massive rally from the end of October ranging from just over 16% for DJIA and S&P 500 to 19.9% for NASDAQ and 26.2% for Russell 2000 at their respective recent highs just before yearend,” analysts said.
“But the selling over the past few days is notable and a warning sign.”
The Santa Claus Rally is traditionally defined as the S&P 500's tendency to rally during the last five trading days of December and the first two of January, with an average gain of 1.3% since 1950, as per the analysis of Stock Trader's Almanac.
This indicator, discovered by Yale Hirsch and first published in the Almanac in 1973, is not unfolding as expected this year.
“The lack of a rally can be a preliminary indicator of tough times to come.”
Instances of a decline in the Santa Claus Rally have been notable precursors to significant market downturns.
The 4.0% decline in 2000 preceded the bursting of the tech bubble, while a 2.5% loss in 2008 foreshadowed the second worst bear market in history. Analysts also flagged flat years in 1994, 2005, and 2015 after a failed Santa Claus Rally, along with a mild bear market that concluded in February 2016.
Examining the 15 down SCRs since 1950 reveals a mixed outcome, with 10 up years and 5 down years, but the average gain is modest at 5.0%.
This historical pattern aligns with the cautionary saying from Yale Hirsch, stating, "If Santa Claus should fail to call, bears may come to Broad and Wall."
“If these seasonal indicators are negative and the market does not rally as it normally does during this time, we will likely shift to a less bullish posture – if not outright bearish,” analysts concluded.