What is the “Santa Rally” and will it visit investors again this year?

Around this time of year, we invariably hear talk from market commentators about the coming “Santa Rally”.

Just what is this event, why does it exist and when can we expect it to occur?

What is the Santa Rally?

The Santa Rally is the increase in Australian share indices that has historically occurred from around mid-December to early or mid-January. Typically, this event lasts for a period of around three weeks and is also experienced in equity markets overseas.

Proponents of Efficient Market Hypothesis may argue events like the Santa Rally should not or do not exist, however research over several decades has shown it does.

Momentum and seasonality impacts markets and has led to another term you may have heard: “Sell in May and go away”.

Such events and phrases might sound silly to some, but shouldn’t come as a surprise when you consider that not all equity market participants base their investment decision on logic alone.

Why does the Santa Rally exist?

I haven’t heard a definite answer, though I believe there are three key reasons as to why the rally in Australia occurs:

  1. Bank dividends: Commonwealth Bank of Australia (ASX: CBA) already paid its final dividend on 29 September, but the remainder of the Big 4 are yet to line shareholder pockets. National Australia Bank Ltd (ASX: NAB) will pay its final dividend on 13 December, followed by Australia and New Zealand Banking Group (ASX: ANZ) on the 18th and Westpac Banking Corp (ASX: WBC) on the 22nd. These billions of dollars must go somewhere, other than being spent on Christmas presents.
  2. Most market professionals, like other workers, go on holiday during this time, thus reducing trade volume on the ASX and the practice of short-selling. Retail investors typically “go long” and this drives prices higher.
  3. The Santa Rally may have become a self-fulfilling prophecy; market participants expect the event to occur and trade accordingly.

When can we expect the Santa Rally to occur?

Looking back each year to 2012, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has increased around 200 index points during a three-week period beginning on the third-last Friday of December.

If this trend were to continue, this year’s Santa Rally would start on 15 December and end on 5 January.

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Motley Fool contributor Ian Crane owns shares in Australia and New Zealand Banking Group, National Australia Bank and Westpac Banking Corp. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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