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November's rocky ride casts doubt over Christmas rally

Nicki Bourlioufas  |  07 Dec 2018Text size  Decrease  Increase  |  
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Markets traditionally rally into Christmas, but November's bear market has raised a question over whether Santa will visit stock markets this year after a volatile year of share trading.

One of the most consistent seasonal patterns in the market has occurred at the end of the year and early into the New Year. This is often referred to as the Santa Claus Rally or the Christmas Rally according to Shane Langham, a senior private wealth adviser with PhillipCapital.

A key reason for the rally is the American tax year, which runs the same as the calendar year, Langham says. This is generally a busy time for US markets as institutions, fund managers and the public at large reposition their portfolios for the new tax in the US. This in turn makes it a busy time for the Australian market.

stocks up and down rebound rally

Investors are urged not to get too excited at the thought of a Christmas rebound

Shane Oliver, chief economist at AMP Capital chief economist, agrees.

The Christmas rally "seems to be a combination of buying as shares rebound after the seasonally weak months of August to November, which is helped along by optimism about what the new year may bring, the investment of bonuses by workers, a lack of capital raising at this time of year and thin volumes making it easier for any buying of shares to push share prices higher."

According to Langham’s analysis, looking at the last 38 years, there are two years that went sideways (1987 and 2008), another four years which went down (1981, 1990, 2007 and 2011), while the other 32 years went up.

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"This provides us with an 84.2 per cent chance that 2018 will see the market move up over this time from now till the first week of January," said Langham.

"Looking at all the numbers for all 38 years, most Santa Claus rallies started from late November (20th-30th) and this is followed by a mid-December (10th–20th) start date.

"These rallies have lasted on average 44 days and have ended 81.3 per cent of the time in the first two weeks of the New Year. Over this time the average gain has been 183 points or 7.2 per cent," says Langham.

However, Langham cautions against getting too excited about a Christmas rally this year given November's bear market.

"Since the 30th August (6373.5) top we have fallen 779 points or 12.2 per cent to the 21st November (5594.0) bottom. When we look back over 1990, 2007 and 2011, three of the years that Santa didn't come to town, we can see that each of these years also had strongly bearish leads starting in early August for 1990, the start of November for 2007 which started the GFC and mid-April with sharp spike down in early August before moving sideways for the rest of the year in 2011.

"These three years couldn't shake the bear and if we keep making new lower lows here in 2018 we could have another year where Santa can’t find his way to our market Down Under.

"Because of this I am looking for strength before I would position long the XJO (and stocks) following that up with sensible stop-loss levels and money management," says Langham.

This view is supported by Peter Fay, the director of Prime Services with Invast Global. His analysis reveals that over the past 23 years, December has seen a monthly gain on 18 occasions and a decline just five times.

"This is the highest percentage of gains of any month and the average return performance for December is also the second highest over these 21 years. This lends statistical weight to a Santa Claus rally," says Fay.

"However, with concerns still over Brexit, the US and China trade war and what to do about the Saudi Arabia, there are plenty of geopolitical headwinds going into the end of the year."

Closer to home, the stock market is still feeling the fallout from the Hayne royal commission, falling housing prices and the increasing likelihood of Labor government victory, and its winding back of surplus franking credits.

"Given all the competing forces, I am bullish into the end of the year, but still expecting an increased level of volatility for at least the next few months," says Fay. If the markets perceive a thawing of relations between the US and China following the G20 meeting, this should be positive for the market.

But Oliver warns of other Yuletide risks, particularly as Donald Trump marks his first Christmas in the White House.

"Of course, a tweet or comment by President Trump could always throw a spanner in the works, particularly if the threat to raise tariffs on China to 25 per cent on January 1 looks like taking place, but we are optimistic that Santa will come again this year for investors after what so far has been a rough year."






is a Morningstar contributor.

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