Christmas 2021 has come and gone, but will the markets have good cheer to end the year?
For those who wondered, the Santa Claus rally period covers the last five trading days of the year and the first two of the New Year. In 2021, the dates are Dec. 27 through Jan. 4. Those seven trading days could be the indicator of what's to come in 2022.
Yale Hirsch once observed that if the markets were higher during this seven-day trading period that it would be a bullish year ahead. Since the 1960s this has often been the case, as the period has racked up gains more than 60% of the time. It has been a fairly reliable indicator over the years, but not 100% perfect.
There are other anecdotal calendar sequences that follow, including the first five trading days of the year, which if positive often lead to a positive January, which often leads to a positive year. Whew! Of course, these are simple notions of history, but we note that history does not always repeat or even rhyme.
How do we use these calendar anecdotes? We certainly cannot trade on them unless there is additional evidence of a trend. We can use these statistical abstracts to bolster a bullish or bearish position. But we should always defer to the charts and technicals to lead us in our analysis. Is there a pattern of higher highs and higher lows? Are breadth and volume trends positive? Is price action giving a bullish or bearish sign? How about moving average convergence divergence (MACD) and relative strength?
These are all important considerations along with any seasonal trends and anecdotes mentioned above. Trying to game the market based on calendar trends is a recipe for doom.
Could you be successful at it? Sure, just like flipping a coin you have a 50/50 chance. But following the market trends can give you a far better edge, and if Santa Claus spreads cheer there could be some nice gains to be made.