Brendan Mcdermid/Reuters
The year-end rally that catapulted the Dow Jones Industrial Average and Nasdaq 100 to record highs earlier this week is likely to extend into next week.
That's because the stock market has a strong tendency to rise during the last five trading days of the year and the first two trading days of the new year, commonly referred to as the Santa Claus rally.
The phenomenon was discovered in 1972 by Yale Hirsch, creator of the "Stock Trader's Almanac". This year, the Santa Claus trading window begins on December 22 and ends on January 3.
According to historical data dating back to 1950, the S&P 500 has posted an average return of 1.3% and is positive 79% of the time during the Santa Claus trading window, according to data from Carson Group's Ryan Detrick.
The period marks the strongest seven-day period in which stocks are reliably higher, and aids December in being the best performing month of the year for the stock market, according to Detrick.
And when using stock market data going back to 1928, the average gain during the Santa Claus trading window is even stronger at 1.6%, according to data from Bank of America. If that type of gain materializes this year, it would send the S&P 500 to new record highs.
"The Santa Claus rally is real," Bank of America's technical analyst Stephen Suttmeier said in a note earlier this month. Suttmeier added that the upcoming trading window is also bullish during year three heading into year four of the Presidential cycle.
"This period from late December Presidential cycle year three into January year four is also bullish with the S&P 500 up 70% of the time on an average return of 0.90%," Suttmeier said.
But if a Santa Claus rally doesn't materialize over the next week seven trading days, it could serve as a warning sign to investors that the coming year might see a weak start for stocks.
Over the past 30 years, the five times stocks posted negative returns during the Santa Claus rally period, the month of January was lower for stocks each time.
"Notably, there was no Santa Claus rally in 2000 and 2008, not the best times for investors, and potentially some major warnings that something wasn't right. Lastly, the full year was negative in 1994 and 2015 after no Santa [Claus rally]," Detrick said.
Accordingly, Hirsch coined the phrase, "If Santa should fail to call, bears may come to Broad and Wall."
The New York Stock Exchange is located at the corner of Broad and Wall Streets.
