By Philip Moskie

A Christmas Rally or Santa Clause Rally as it is sometimes referred to, is an end of year Rally usually occurring in December. According to Forbes magazine based on historical data, there is 77.9% chance of a Christmas Rally. Since 1926 it is a very reliable rally, but no one really knows why it occurs. 

• Introduction
• Current Circumstances
• Other times this happens
• The market knows
• Conclusion

Introduction

Recently, while watching the daily financial shows I noticed that the hosts kept asking their guests whether there will be a Christmas Rally. Like robots, they all nodded their heads and said yes sir and many also added: “this may be the start of a pivot to a new bull market.” This really grated on my nerves because we were already in the middle of an overextended extended rally. Any trader worth his salt could see from the charts that there was little if any room for the market to continue going up. It was very clear that it was going to top out and begin a new leg down toward the bottom of the current bear market Channel it is in. 

The scary thing is that people actually listen to these experts, and they have been wrong through this entire bear market. They are constantly calling “bottoms” that never materialize. Either they have no real market sense, or they are misleading people to keep them coming to their shows to get the real secrets of the market. You would think that after the recent FTX collapse that they would wise up about what they are saying to investors. Ask people like Tom Brady or Kevin O’Leary how it feels to be sued for millions of dollars for accidentally misleading people. 

So, in this article we won’t be reviewing the amazing track record of “Christmas Rallies”. We are not going to be debating theories as to why this rally occurs with such consistency. In this article we will explore the flawed thinking that made many professional financial experts believe that a Christmas rally will magically show up this time around. 

Current Circumstances

As I mentioned, I’m watching “market experts” prognosticate on how strong a Christmas Rally we will get. Each time they spoke, I would pull up the following chart:

Chart provided with courtesy of Tradingview.com

The first orange line is September 30, 2022, and the Dow jones industrial average is approximately at 28,800. The second orange line is December 1, 2022, and the Dow is 32,900. That’s a gain of 4,100 or just over 14% in just a 2-month period. 

Do you want to know a secret? Here it is. I hope you are ready for it. That was the rally! It was not really in December, but it was very close. It might not have been 100% the Christmas Rally. It started as a bear market rally from a very oversold position. But rest assured it was the rally! How was it? Did you take advantage of it?

How any professional market experts can look at the chart of the Dow above and expect the market to continue to rally is beyond me? How much are they looking for 20%; 30%? This the Dow Jones Industrial Average that has just had a tremendous rally in the middle of a bear market and the so-called experts think it is going to keep going higher. The numbers for the Nasdaq and the S&P are even bigger. 

I am puzzled by this because the macro-economic conditions that exist are still very bad. The fed has been pounding the economy since April with interest rate hikes. These hikes have shown just a marginal effect on inflation. Most serious economists predict that the rate hikes are going to lead to a severe recession. Then why would many stock experts think that a rally of almost 15% in the Dow is just not enough? 

When you look at the right side of the chart you see that the Dow has already has begun its downward trend. It’s already midway through the month! If this continues, I will bet you a dollar that these so-called experts proclaim that the rally didn’t happen this year. That was the rally! 

Other times this happens

I see the same thinking when there are scheduled events like earnings and other economic numbers. The market knows that the event is absolutely going to occur. The move, up or down, always occurs before the event. Only if the actual event is a disaster compared to what the market expected will there be any reaction to the event itself. 

Many neophyte traders and investors get themselves in to trouble this way. They see a company announce an “unexpected beat” above their revenue and earnings projections. Trader’s pile into the stock thinking that the news is great for the company. What they don’t realize is that the stock has already had its move and they missed it. Often these traders will get caught in the down draft of an overbought condition and lose money even though the stock just reported amazing results. I expect these mistakes by beginning traders, but experienced market professionals, come on!

The market knows

Whenever a stock or the market has a scheduled event, the market knows what is going to happen. Very rarely is the market surprised. If you are watching a stock that you like and their earnings announcement is about a month away, what is it doing? Is it going up or down? Whatever direction it starts to move in as the earnings get closer will tell you if the report is going to be good or bad. When it comes to scheduled events, the market will always move prior to the event, not after. 

Key Take Aways

• Never trade based on what you see or hear in the financial media
• If there is a planned event that will effect your stock, the move will happen before the news not after
• Develop common sense when setting your trading goals

Conclusion

The moral of the story here is to not trust the financial media to try to trade stocks. They are wrong most of the time and they have no accountability. Develop a commonsense mindset of seeing the market as it is, not as you want it to be. Always ask yourself “is what I am expecting to happen a reasonable expectation? What are your goals for your stock? Do you set definitive goals like 20% on this position or do you buy a stock, hold it, and watch it bounce around waiting for your arbitrary decision as to when to sell? In today’s tough market, you need to set rules to trade by and then stick to them.