How The Santa Claus Rally Could Predict January And 2021 Returns

The S&P 500 has rebounded since the lows seen in March. The Santa Claus Rally that could happen during the last few days of 2020 could help predict the performance of stocks in 2021.

What Happened: The Santa Claus Rally is typically defined as the last five trading days of the year and the first two trading days of the following year.

This year’s Santa Claus Rally begins on Dec. 24 and includes seven trading days ending on Jan. 5, 2021.

Related Link: 30 Stocks And ETFs To Watch After 2020 Election Day

Santa Claus Rally Performance: A chart from LPL Research highlights the performance of the Santa Claus Rally and its prediction of how January and the full year will perform for stocks.

The chart, which dates back to 2000, shows that if the seven days are bullish, the market typically performs well in January and the full year. If Santa fails to call, the market could be in trouble.

The #SantaClausRally starts tomorrow (final 5 days of the year and first two of the following year).

Going back to 2000, it is pretty clear if these usually bullish 7 days are higher, it bodes well for January and the full year.

If Santa fails to call? Trouble could be coming. pic.twitter.com/k5gUlb7yfy

— Ryan Detrick, CMT (@RyanDetrick) December 23, 2020

Last year saw the S&P 500 was up 0.3% in the seven trading days. The index lost 0.2% in January and closed the year up 14.4%.

The rally in 2018 could have been a better indicator with the index up 1.3% in the seven days, up 7.9% in January and up 28.9% for the full year.

The best overall year performance since 2000 was 2012, which saw the S&P 500 up 2.0% during the Santa Claus Rally, up 5% in January and up 29.6% for the full year.

Since 2000, the Santa Claus Rally saw gains of 1.2% or more on nine occasions. In the nine times this happened, the full year saw negative returns only twice and had double-digit gains six times.

The key indicator here could be if the S&P 500 can gain 1.2% in the Santa Claus Rally.

Price Action: The SPDR S&P 500 Trust ETF SPY is up 14% in 2020 and has traded between $220.15 and $370.66 during the year.