The Christmas carol goes ‘Tis the season to be jolly’ and the stock market is no exception. Monthly patterns in Sensex show that investors have a high probability of making profits on stocks they buy in the month of December. Is it really Santa and his elves working their magic on the bourses? Not quite.
What is it? Globally, the term, “Santa Claus Rally”, refers to a surge in the price of stocks that occurs in the second half of December, when both Christmas and New Year’s Eve fall. In India, the festivities seem to start a little earlier, with the market usually upbeat throughout the month of December.
There are many reasons given for Santa Claus rallies — from festive cheer that puts investors in a buying mood, to tax considerations which make traders book profits, to investment managers doing some quick window-dressing to make their year-end returns look good.
Many also consider the rally to be the result of people buying in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect.
Traders may also like to wind down their (short) trading positions early in the month to enjoy the holiday season with their families. Hence the quip that Santa Claus rallies are helped by bears going into hibernation.
Why is it important? Santa Claus doesn’t just shower festive cheer only on Wall Street; Dalal Street gets its share too. The Sensex has recorded positive closes in December in 28 out of the 35 years since 1979, suggesting a high probability of pocketing gains from stock market investments made at the beginning of this month.
The index was launched in 1986 with the base year as 1978-79. The average return an investor made during the month since 1979 was 3.4 per cent. That’s a higher average return than any of the other months in the calendar. The highest gain was clocked in December 2003, when the Sensex soared 15 per cent.
Geeks cite the Santa Claus rally as proof that the market is not efficient, as market efficiency (where everyone is aware of the trend) should actually make this effect disappear. But given that it has persisted over the decades, having first been documented overseas by Yale Hirsch in his Stock Traders Almanac in 1972, there’s no reason why it shouldn’t ring true this year as well.
Why should I care? Being a well-established trend backed by data, recurring Santa Claus rallies suggest that December is not a bad month to invest.
So, if you’ve been dithering about your equity investments, this is as good a month to start as any. Of course, given the possibility of quick gains, it’s also the cue for high-risk investors to put money into the markets before the close of the year.
Whether it’s your Christmas or Diwali bonus, or just some surplus cash that you have lying around with you after a hard year’s work, the December effect is a good signal to invest in the markets with some assurance of decent returns on your investment.
The bottomline Betting on a Santa Claus rally may not seem a very rational way to invest. But who said the markets are rational? Sentiment and behaviour often sway the markets more than cool reason.