Why ASX 200 shares could add ~$70bn during the Santa Rally

The Santa Rally is upon us.

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Santa at the beach gives a big thumbs up, indicating positive sentiment for the year ahead for ASX share prices

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Don’t fret about today’s market sell-off as at least one prominent expert is predicting that ASX shares are entering the Santa Rally, which is their strongest trading period for the year!

If this prediction comes to pass and if history is any guide, shares on the S&P/ASX 200 Index (ASX: XJO) could generate gains of around $70 billion for shareholders during this Santa Rally.

The Santa Rally describes the strong trading period in the two weeks before Christmas till early January.

Santa Rally for ASX shares is an 85% probability

No one can quite explain why ASX shares perform well at the end of the year, but the Santa Rally is one of the most reliable seasonal trends on the market.

Over the last 41 years, the Santa Rally has visited ASX shares 35 times, according to Bell Potter’s high-profile trader Richard Coppleson.

“Well, if we do what we have done most times in the last 41 years – then yes – markets are close to entering a sweet spot of no resistance,” said Coppleson. “That could see a decent rally over the next 3 weeks.”

Billions in Christmas gifts for ASX investors

What this suggests is that if you bought the market now and held on for the next 14 to 16 trading days, there is an 85% chance that you will make money.

What’s more, the average gain in the 35 out of the last 41 years is an impressive 2.9%. Applying that to the total market capitalisation of all ASX 200 shares, this average return will equate to $69 billion.

Not a bad gain for a two-week trade! What’s more, Coppleson noted that 25% of the time, the average gain was over 6%.

A magical time for ASX shares

The Santa Rally phenomenon isn’t confined to ASX shares. The US market also experiences the magic of Christmas. The Santa Rally has struck the S&P 500 (INDEXSP: .INX) index in 21 of the last 27 years, although its average gain is a more modest 2%.

No one can quite definitively say why this happens. Efficient market theorists will claim that arbitrage opportunities like this should not exist.

But science can’t beat magic – not during Christmas!

Possible ASX share drivers behind the Santa Rally

However, there may be a few logical reasons behind the Santa Rally, according to Coppleson. One reason is the lack of major capital raises as we head full swing into the holiday period. You can imagine CSL Limited (ASX: CSL) and its bankers scurrying to close off its record-breaking $6.3 billion cap raise before fund managers go off on their holidays.

Capital raises suck money out of the market as fund managers may sell shares in other companies to participate. Coppleson estimates that cap raises take in around $2 billion a month on average.

That equates to the amount of superannuation money going into markets per month, which will be directed to buying shares instead during the Christmas to New Year period.

Doesn’t take much to move ASX shares up

Further, any buying during this time will be met with few sellers as professional investors have closed their books for the year and won’t be doing much, if any, selling.

Also, there’s a wall of ASX bank dividends that will hit the market from the middle of December. A chunk of it will be devoted to a dividend reinvestment plan (DRP), which puts further buying pressure on some ASX shares.

These include the Westpac Banking Corp (ASX: WBC) share price, National Australia Bank Ltd. (ASX: NAB) share price, Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price and Macquarie Group Ltd (ASX: MQG) share price.

Dividends boost adds to Christmas cheer

“I’ve also worked out that $9.48 billion in dividends are paid 15th Dec NAB, 16th Dec ANZ, 21st Dec WBC & MQG 14th Dec,” said Coppleson.

“So, if you assume a 18% DRP on NAB, ANZ & WBC (So about $1b less cash), then actual cash that will come back into the market is about $8.5 billion.”

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Motley Fool contributor Brendon Lau owns Australia & New Zealand Banking Group Limited, CSL Ltd., Macquarie Group Limited, National Australia Bank Limited, and Westpac Banking Corporation. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended CSL Ltd. The Motley Fool Australia has recommended Macquarie Group Limited and Westpac Banking Corporation. 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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