It was a mixed week for the TSP stock funds. As we near the end of an historic year, we are beginning what has historically been the most profitable 7 day period for stocks… We’ll get into the phenomena known as “The Santa Clause Rally” and discuss when/how/if we should be investing in it… For the week the C fund was down 0.17%, S fund up 1.24%, I fund down 0.43%, and the F fund up 0.17%.

The Santa Clause Rally

According to Investors Business Daily, the actual cause(s) of the rally are hard to pinpoint but, here are a few theories:

  • Window Dressing: Institutional investors (like big banks, hedge funds, mutual funds and pension) often make big stock buys before the end of the year to “bulk up” their portfolios with stocks that performed well, which gives a boost to leading stocks.
  • Year-End Bonuses: Individual investors, who tend to be more bullish as a group than institutional investors, will often have year-end bonuses to spend and some time off to spend it. This often results in more buying, which drives stock prices higher.
  • Tax Purposes: To take advantage of tax code loopholes, some investors will sell stocks they’ve taken a loss on at the end of December and buy them back in January. This creates an artificial stock price bump in January, and investors anticipating this may drive up prices at the end of the year.

Investor Psychology can also have an effect:

  • Holiday Cheer: There’s cheer in the air around the holidays! This can manifest itself in an optimistic outlook that leads to more buying and higher stock prices.
  • Self-Fulfilling Prophecy: People believe in the Santa Clause Rally, so they expect the market to rise People buy more stocks and, as a result, the market rises.

Regardless of the “WHY”, here are the important facts around this phenomenon that could affect our reallocation decisions during this time period. The Santa Clause Rally (SCR) came from an observation made by Yale Hirsch, founder of The Stock Trader’s Almanac. He defined the SCR as the last 5 trading days in December and the first 2 trading days in January. This year, that date range is 24 December thru 05 January. Historically, stocks do significantly better during this period than any other 7 day  period throughout the year.  According to Oppenheimer, since 1928 the S&P500 is up 78% of the time, averaging a 1.7% return. This is compared to all other 7-day periods, up only 57% of the time, and average a return of just 0.2%.​ According to that same Oppenheimer study, 6 months into the new year the S&P500 is up on average of 5.3% when Santa shows up (if stocks rally during this 7 day period).

78% of the years back to 1928, the market was up during this 7 day period! Those are great odds! But, what happens if Santa doesn’t show up?…

“If Santa Clause should fail to call, Bears may come to Broad and Wall.” – Yale Hirsch. In addition to observing and naming the Santa Clause Rally, Yale Hirsch also observed what happened when Santa did not bring a rally in the market. If Santa Clause fails to call (meaning show up for a rally), then Bears (a down market) may come to Broad and Wall (the address of the New York Stock Exchange). When Santa doesn’t show (meaning when the market does not rally during that 7 day period), the S&P500 is down an average of -0.3% 6 months later.​ According to the Stock Traders Almanac, Santa failed to show 6 times since 1994. ​ Odds are, the year following a SCR, the market is up; but this is NOT 100%! ​ Take a look at 2001, 2002, and 2018 below.

How Do We Maximize the SCR?

With odds at 78% that the market moves higher during this 7 day period, you may be more bullish than usual in making reallocation decisions. For me, it still comes down to technical analysis of the charts first. IF the analysis indicates that the market is likely to move higher, the SCR period corroborates. IF the analysis indicates market weakness I would not be invested, even during the SCR period. The chart below is my go-to right now.

In this 2 month chart of the C fund, where each tick is 30 minutes, we have been in a sideways consolidation since the beginning of December. Price has found support at around 3650 but can’t seem to get above 3725, and is setting up a potential Head & Shoulders topping pattern. A daily close above 3715 would give me confidence that the SCR is in place. A daily close below 3630 would indicate that Santa will not come to call…

Charts This Week

The C fund is struggling to stay above its 10DMA and short term trend line. IF the C fund cannot stay above this level, we will likely see consolidation down to the 50DMA.

The S fund continues to roll higher. Until the S fund closes below it’s 10DMA, there is no reason to reallocate out of this fund. The only concern is the current level of over extension. You can see in the chart below, the 10DMA line generally runs about 5% above the 50DMA. Currently, the 10DMA is more than 10% above the 50DMA! At some point, the 50DMA will catch up. The question is whether this is due to consolidation or correction…

The I fund managed to retake its 10DMA this week; a bullish sign. On the downside, the I fund is extremely extended beyond its 50MDA. With indicators rolling over, I am not optimistic. Having said that, price direction is most important.

Bottom Line: The Santa Clause Rally is a real phenomenon and 78% is great odds. Personally, I’m not willing to roll the dice. I want to see PRICE put the odds in my favor…. I’m looking for a daily close above 3715 to potentially get back into the stock funds. A daily close below 3630 would be a real problem.

* The President did not sign the CoVid relief bill this weekend. In addition to the end of the Federal unemployment insurance supplement and eviction protection, if a deal is not reached by Monday night, the Federal Government will shut down. It will be very interesting to see this play out in terms of the stock market and the SCR *

Have a great final week of 2020!

Jerry