First an update on the Bloggers for Charity initiative: Frank Restorick, a financial advisor in Mississauga, Ontario is the leading bidder at $250. The winner makes the donation to a charity of their choice and gets to write a blog post here that can say pretty much anything they want (within reason). Click here for more info, or email me to outbid Frank.
This is a guest post from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
I was asked this question yesterday. For those non-market obsessed people, a Santa Claus rally is when the market rises in the week before Christmas and continues to climb into the start of January trading. (Some people call a rise through-out December a Santa rally, others say it only technically begins in the 5 trading days before Christmas)
Some of the biggest factors that contribute to an occurrence of a Santa Claus rally come from the fiscal positions of investors and market participants, not the stocks that rally. A ton of rebalancing in the market goes on at the end of December as people get things in order for the quarter-end and year-end milestones. Some investors can be inclined and often very encouraged to sell positions they are underwater on for tax purposes and then they reallocate and reinvest those funds elsewhere in the market.
Some market participants are biased to have particular equities close at a lofty height on December 31st as that will affect their performance metric reported and often the bonus owed to them by their firm on the quarter. These high quarter-end closings are referred to as “window dressing”. It is tough (and illegal) for a person or firm to manipulate the whole market to go higher, but when you have an entire industry of people biased to the upside, it tends to go that way.
Santa Claus rallies, window dressings…..these items should remind investors that the market is still just a group of people coming together. Despite the rise in computer trading, it is still people making trading decisions; computers are just used to execute those decisions. Because the market comes down to people deciding things, the market does things people do. The market is slower around lunch, popular vacation times, religious holidays, and long weekends. A big snowstorm can sap the market volume for days. Traders are some of the most knowledgeable people about religious dates and national holidays, and not just the ones that cause the markets to close. A skilled Irish Catholic trader in New York would know when Chinese New Year is and what date Rosh Hashanah falls on.
For everyone dying to know, my answer to the question at the beginning was a very hesitant, “yes” followed by a “maybe”.
As a trader, my market view is always the same. “Could go higher, might go lower.”