With Christmas fast approaching, the seasonal patterns in the stock market suggest that the markets are likely to be stronger into the end of the year. Historically it is normal for the stock market to rally in December. This rally is known as the Santa Claus rally and brings Christmas cheer to all investors.
Seasonal patterns were first discussed by Larry Williams with reference to commodities. Larry noted that seasonal price fluctuations occurred in agricultural commodities with prices falling when there was an abundant supply around the harvest times and prices rising when supply was scarce, prior to the next harvest. These seasonal patterns can also be observed in the stock market as supply and demand for shares fluctuates throughout the year.
The Australian market is typically strong through March and April, as it was this year, and then weaker through June, before rallying again in July. The July rally failed to eventuate in 2011, but the June weakness was certainly visible, so much so it carried on through July. October has a deservedly bad reputation for falling throughout the month and has become famous for the 1987 crash, the 1997 collapse of the Asian economies and the sharp falls during the credit crunch in 2008. A bottom is often formed in November and early December before a strong rally is seen in the final two weeks before the New Year.
The seasonal odds certainly favour a rally at this time of year. In Australia during the last 27 years the Santa Claus rally failed to materialise in just four years 1990, 1995 2007 and 2010. The average return over the last two weeks of December is 4.9%. If this rate of growth was to be sustained throughout the year we would see annual growth of 119% per annum in the markets. Why is it, that Christmas only comes once a year?
While seasonal patterns are not guaranteed to deliver strong profits to investors or traders the patterns do have a high probability of playing out in the future. Not all the reasons for these seasonal tendencies are clear, but it can be very profitable to follow them through all the same. I wish you all a Merry Christmas and I trust that Santa Claus delivers you exactly what you want for Christmas. I will certainly be positioned to take advantage of his generosity.