» Stocks, Forex and Santa Claus
Every December, Wall Street and other world stock exchanges start talking about the Santa Claus Rally: days when market participants have the opportunity, if not to get rich, then at least to seriously improve their financial condition. So, what is the Santa Claus Rally: a real economic phenomenon or just a fairy tale for adults?
» Market Players' Fears and Hopes
The situation in the stock markets is largely seasonal, determined by human psychology. For example, in the summer, the activity of stock market players decreases, and the holiday mood reigns on the trading floors. And with the onset of autumn, along with the black clouds, the fear of the “October curse” creeps into the stock exchanges. There were several major crashes this month that went down in history. Therefore, there is a belief that it is better to take your feet out of the market these days. But autumn is passing, the mood of stock traders is gradually improving in anticipation of the Santa Claus Rally, and trading activity is increasing.
This seasonal phenomenon was first described in 1972 by Yale Hirsch, a well-known analyst, trader, and investor. He published his observations in the Stock Trader's Almanac, of which he was the founder. In addition to the Santa Claus rally, Yale Hirsch also noted other "statistically predictable" market phenomena, including the presidential election year cycle, the January barometer, and the best six consecutive months.
» When, how and why does the Santa Claus Rally start?
Yale Hirsch noticed that stock indices began to rise actively in the last days of December. The Santa Claus rally usually starts on the last Monday of the month and lasts seven trading days. The first day is crucial, as it predicts how the rally will develop and how strong it will be. If the forecast turns out to be correct, the trader has many opportunities to make an impressive profit.
The most common version of this phenomenon is the one put forward by Yale Hirsch himself. He explains the rise by the actions of institutional market participants. Mutual fund managers intensify their purchases of shares in blue-chip companies and other market leaders to issue more attractive annual reports. Since the market is very weak on Christmas days and many participants have already gone on vacation, these players manage to raise prices by a few percent at a low cost. It should also be taken into account that they expect to receive inflated bonuses for their improved performance in this way. Then, after the end of the year, they begin to drop these shares, which leads to a traditional correction in early January.
» What about Forex?
But in the Forex market, unlike the stock market, the situation is somewhat different, and Santa Claus is unlikely to arrange a rally here. Moreover, he can direct his sleigh not only to the upside, but also to the downside. As it slides through the thin ice of melting liquidity, it may fail and sink to the bottom.
As a rule, exchange trading calms down on the eve of Catholic Christmas in the United States and other countries, which is celebrated on December 25. Most players make profits and go on vacation on the eve of this event. The market sleeps. However, it becomes unusually tender and therefore prone to unexpected short-term ups and downs. And as you know, volatile markets can bring not only huge profits, but also no less serious losses.
That is, Forex these days either sleeps, and therefore there is no point in trading on it, or it explodes unexpectedly, and therefore it is dangerous to trade on it. In addition, due to low liquidity, brokers are forced to expand price spreads. For these three reasons, many experts recommend closing all trading orders for currency pairs before December 25 and not opening new ones until January 4, when the markets come out of the holiday hibernation. It is better to relax these days and enter the New Year with renewed vigor and good mood.