Will Stocks See A Santa Claus Rally Next Week?

Theoretically, the week ahead should be quiet for the stock market.

At least on the surface. Trading will stop at 1:00 p.m. EST on Tuesday, with markets closed for Christmas on Wednesday. Volume all week will be low as the big bosses depart for the ski slopes and beaches far to the south.

The markets, however, will still be churning away.

The low volume means that a few sizable trades can push a stock sharply higher. So, don't ignore them.  Twitter TWTR may be up more than 35 percent this month. Tesla Motors TSLA is up more than 19 percent. Facebook FB is up nearly 17 percent. Maybe another stock will join them.

More important, what happens starting Monday through January 3 may offer a signal of what may be ahead in 2014.

The question is if there will be a Santa Claus Rally. Everybody has a definition of a Santa Claus rally. In this case, we're looking at how the Stock Trader's Almanac looks at.

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The research suggests a nice rally for the Standard & Poor's 500 Index in the last five trading days of the year and first two of the next year is a bullish signal for stocks. A losing S&P 500 performance often precedes a bear market.

In 2007 and 2008, the almanac says, the S&P 500 fell 2.7 percent during that trading period. In 2008, the S&P 500 fell 38.9 percent. In 1999-2000, the index fell four percent. In 2000, the S&P 500 fell 14.5 percent. (For perspective, the Nasdaq Composite Index fell 40.5 percent in 2008 and 39.3 percent in 2000).

The biggest Santa Claus rally came in 2008-2009, during the financial crisis.

The S&P 500 jumped 7.4 percent. It looked like 2009 was going to be a big loser after the S&P 500 fell 25 percent between December 31 and March 9, but then the big rally erupted, and the index closed 2009 up 23.5 percent. The worst performance was that 4-percent loss in 1999-2000.

Is the market performance over this specific period a statistical fluke? Maybe. In fact, the Santa Claus performance has been wrong. In 1989-90 sequence, the index rose 4.1 percent. The S&P fell 6.6 percent in 1990, mostly because of the buildup to the 950, the first Persian Gulf War.

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The Santa Claus Rally is a fairly regular occurrence: There have been 33 over the last 43 years, with an average gain of 1.6 percent.

It is also well known that the market's best overall performance comes in the six months between November 1 and April 30 in the year following. (Since 1950 the S&P 500 has fallen just 14 times in the month of December and 25 times in January.)  

So, the Santa Claus rally may be just a small piece of a larger statistical reality.

Still, that we're even talking about it has as much to do with the stock market's 2013 boffo performance and the loud debate about whether 2014 will be a good year for stocks.

The S&P 500 finished Thursday up 26.9 percent for the year, potentially its largest gain since 1997. The Dow Jones Industrial Average is up 23.5 percent; it's looking at its best year since 2003. The Nasdaq is up 34.4 percent. That will likely be its best year since 2009.

The consensus suggests a decent year for stocks in 2014, based on the idea that the economy will continue to grow. All with the blessing of a Federal Reserve which will continue to keep interest rates low as it dials down its bond purchases.