The holiday season is officially here, which can mean more optimism in the markets … But will we see a Santa Claus rally in 2019?
To answer that, we’ll need to take a step back and look at a few things…
- How’s the overall market?
- Is the Santa Claus rally real — and if it is, how can you take advantage?
- Do the holidays affect the market?
Spoiler: Yes, the Santa Claus rally is a thing … sometimes. Read on as we take a look at how the end of the year can bump the markets up and why it happens.
Let’s check out how smart traders can play this lucrative December trading phenomenon.
Table of Contents
- 1 What Is the Santa Claus Rally?
- 2 How About That December 2018 Drop?
- 3 Fundamental Factors
- 4 Psychological Factors
- 5 Conclusion
- 6 One Platform. One System. Every Tool
What Is the Santa Claus Rally?
This mid-December rally typically occurs after traders and investors sell their losing positions for tax purposes. And sometimes they then start investing in other companies, spurring a year-end rally.
A strong economy and stock market are big factors here.
Consumers spend more and boost company revenues, and traders and investors buy into companies. All that activity can push the market to new highs in anticipation of holiday sales numbers.
The Santa Claus rally sometimes continues into January, which at that point becomes the January effect.
How About That December 2018 Drop?
A ton of geopolitical forces were at play at the end of last year and the market required a long-needed correction to blow off some steam.
Then there was some tax-loss selling, which drove prices lower as well.
But in spite of the negative sentiment spewing out of the mainstream media, the U.S. economy was still strong. Traders and investors solidified that into the start of 2019.
Prices quickly rebounded from troughs just after Christmas. They sprang into a delayed Santa Claus rally and very strong January effect, setting record gains for the month.
This year, things are different. So there’s no guarantee we’ll see a Santa Claus rally, but it seems extremely probable. There are a number of factors to look at here, so let me dive into each to explain why I’m so bullish.
A Strong Economy
A strong economy is glaringly obvious. We saw a surprisingly large amount of jobs added in November. And we had great wage growth, and unemployment is at 50-year lows.
I see this amazing job environment when I stroll through local businesses. The ‘Help Wanted’ signs almost pop off the walls! Business owners are desperate to find new people to hire.
Now, I don’t watch TV, I just look around. Housing is booming. I live in a puny lake town of 800 people, and houses sell in a week. One of my family members was outbid on three houses — and she was bidding the asking price.
I’m friends with a ton of contractors and builders. They’re so swamped with business that they literally won’t even answer the phone if they don’t know who it is. I think that’s a great indicator of a solid economy.
It also seems like a lot of workers have more disposable income. Almost everybody I know has a new car or truck and a stable job. A lot of them are working overtime.
I don’t think we’ve seen this kind of national bullishness in America since the 1950s.
And this great business environment can further encourage massive consumer spending through the year’s end.
Record Black Friday Sales
Black Friday and Cyber Monday sales often set a precedent of holiday spending for the rest of the season. This year, we saw online sales through the roof, and major retailers announced killer revenue numbers.
These blowout Black Friday and Cyber Monday numbers can encourage a lot of speculators to get into the market in anticipation of amazing holiday revenues.
So, will we see a Santa Claus rally? I think so. I think it’ll probably continue through Christmas as traders and investors feel energized to ‘buy the rumor.’
I’m even prepared to be surprised by better-than-expected holiday sales numbers with a Santa Claus rally leading up to it.
Fed Interest Rate Cuts
The Federal Reserve cut interest rates a few times this year as they were spooked by last year’s December selloff. The rate dropped from 2.5% at 2018’s close to 1.75% as of December 2019.
The lower rate encouraged businesses to further invest in themselves and brought a lot of investors away from bonds and back into stocks.
The lower rate also encouraged consumers to spend more, as they have to pay less to finance products.
Stock Market at New Highs
My bullishness going into the holiday season is no surprise as the U.S. stock market has been surging to new highs since halfway through 2019. These new highs encourage speculation as there’s no previously established resistance to compare to current market prices.
The fears over the trade war with China have taken a back seat, and traders are feeling more optimistic that we might actually reach a deal. Actual major negative trade news could break the spell, however.
This is one catalyst I’m keeping an eye on, but I don’t sweat the usual media coverage of the U.S.-China trade war.
That said, a lot of traders and investors are betting in favor of the economy and further growth. They see the fundamental factors and dive straight in when they see those new highs.
Dollar General Corp. (NYSE: DG) blew out earnings and gapped up. Express Inc. (NYSE: EXPR) blew out earnings and gapped up too. Stage Stores Inc. (NYSE: SSI) has been on a massive supernova run. It was a 70 cent stock in October and hit over $7 recently.
Does it get any more bullish than this? This is how I predict a Santa Claus Rally — by actually watching the market. Right now, I see it rallying and quickly bouncing back from dips.
The growing trend of commission-free trading is encouraging speculation too. We’re seeing tons of low-float short squeezes in penny stock land. Personally, I’ve been taking advantage of these great setups.
What’s the real effect of commission-free trading? I think it’s largely psychological. I also think it can encourage much more speculation. That means greater liquidity and volatility — we’re all about that at StocksToTrade Pro.
This should contribute to an even stronger Santa Claus rally as eager retail traders see the market rallying to higher highs. They want to buy in to avoid missing out on any more gains. FOMO is real.
I always encourage traders to wait for a dip, wait for the right setup, instead of chasing stocks that can get away.
Mainstream Media Disinformation
Too many traders put too much stock into what the mainstream media says. These days, it seems the media will do anything for views and clicks.
Too much of it feels like a tabloid masquerading as real news. But fear sells, right? So does doom and gloom. Tune into any of the main networks and it seems like the economy collapsed multiple times this past year.
When it comes to the economy what do they focus on? The trade war with China. Or every time the market dips, the coverage turns to a potential huge selloff. They’re almost always wrong.
This year, Black Friday was supposedly awful until Monday when suddenly the narrative flipped to show it was the biggest Black Friday ever. Fear and negativity always get the most clicks and ad revenue. Media is a business, after all.
When the Santa Claus rally continues to new highs, the talking heads might finally catch on and encourage buying the tail end of it. But by that time, most of the edge will be lost.
This is informational inefficiency. This is why it’s key to be an informed and prepared trader.
That’s what we’re all about here on the StocksToTrade blog, the SteadyTrade podcast, and StocksToTrade Pro! Whether you’re looking to play the Santa Claus rally or find the next hot sector, StocksToTrade can help.
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I’m almost certain we’ll have a Santa Claus Rally this month.
We have a strong economy and interest rate cuts have improved the fundamentals of most companies. Combine that with holiday spending numbers that should be in line with record Black Friday sales numbers, and the odds get better.
We might just see blowout holiday revenues this year.
Plus, the market’s reaching all-time highs … Commission-free trading is luring more inexperienced newbies to trade … And informational inefficiencies can drive traders to make crazy trades. It’s a perfect environment for a Santa Claus rally.
Of course, nothing’s guaranteed. But I think you’re missing out if you’re not in the markets right now. Don’t sit by just because you believe what the news is feeding you.
At StocksToTrade Pro, we’re focusing on how we can be better traders every single day. Is the market up? Is it down? It doesn’t really matter when you become a knowledgeable and informed trader. You can learn to adapt to any market — but you gotta put in the work.
When I look at actual data, I see a Santa Claus rally surging to new highs as we rush into a new decade… Wanna see how I trade every day? Join me and an amazing group of traders at StocksToTrade Pro now!
What’s your classic holiday trading strategy? Leave a comment!