{"id":216856,"date":"2024-12-30T12:15:00","date_gmt":"2024-12-30T17:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=216856"},"modified":"2024-12-31T03:44:26","modified_gmt":"2024-12-31T08:44:26","slug":"santa-rally-down-but-not-out","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/santa-rally-down-but-not-out\/","title":{"rendered":"Santa Rally: Down but Not Out"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">The so-called Santa Claus rally refers to the market\u2019s tendency to rise during the last five trading sessions of a calendar year through the first two of the new year.\u00a0 At this point, it might be something of a self-fulfilling prophecy, as experienced traders expecting the market to rise position for a bump.\u00a0 The exact reasons are murky, however, but some rationales include:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Markets tend to go up over time, so those upward moves can be exacerbated by thin volume (aka, \u201cdon\u2019t short a dull tape\u201d).<\/li>\n\n\n\n<li>Portfolio managers have an incentive to \u201cwindow dress\u201d their holdings, meaning they want to push their holdings higher into year-end to boost their performance.<\/li>\n\n\n\n<li>New money flows into the market at the start of a new calendar year.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">As I write this, just before midday Eastern time, the rally has evaporated.\u00a0 All the key market measures \u2013 the S&amp;P 500 cap-weighted (SPX) and equal weighted (SPW), Nasdaq 100 (NDX), Russell 2000 (RTY), and Dow Jones (INDU) are all down between -0.7% and -1.5% in the 3 1\/2 sessions (so far) since last Monday.\u00a0 That\u2019s not the encouraging start that many had hoped for, but we are literally only halfway through the period.\u00a0 That is hardly an insurmountable loss \u2013 especially if my hypothesis about pension fund selling is correct.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><br>We proposed this hypothesis on Friday, in the piece entitled <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/there-goes-santa-claus-2\/\">There Goes Santa Claus?<\/a>.\u00a0 I stand by the assertions made, <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/there-goes-santa-claus-2\/\">including<\/a>:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>Today [Friday] is a reminder that just because a \u201cSanta Claus\u201d rally is a statistical likelihood, it is far from guaranteed.<\/em><\/li>\n\n\n\n<li><em>The best I can figure out is that there are large accounts, pension funds and the like, who need to rebalance their holdings before year-end.<\/em><\/li>\n\n\n\n<li><em>Can I be certain of this?\u00a0\u00a0 I not been able to confirm first-hand that this is the case.\u00a0 But it is certainly a highly logical explanation.\u00a0 Considering how stock and bond prices have diverged over the past quarter and past, it is highly likely that stocks have become a disproportionately high percentage of a balanced portfolio.\u00a0 Simply put, if a fund desires a 60\/40 ratio of stocks to bonds in its portfolio, and the stock portion has risen while the bond portion has fallen, they will likely find themselves with, say, 65\/35 or 70\/30.\u00a0 Getting back into balance would require selling stocks and buying bonds.<\/em><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">We did acknowledge a potential flaw in the theory, noting:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>Unfortunately, there is a flaw in the \u201crebalancing\u201d theory:\u00a0 Bond prices haven\u2019t been the inverse of stock prices since early in the session.\u00a0 It is possible that the overall selling in bonds remains substantial, or that the funds are simply raising cash.\u00a0 We see short-term rates lower on the day, so it would make sense if the funds raised from selling stocks are being deployed in cash equivalents.\u00a0 Or of course, the sellers may be waiting until their sales settle on Monday.<\/em><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Considering that bond yields are sharply lower this morning \u2013 about 7-8 basis points in the 2- through 10-year Treasury notes \u2013 it appears that the theorizes one-day lag was accurate as well.\u00a0<br>One question I received was \u201cwhy pension funds?\u201d\u00a0\u00a0 My answer: They\u2019re not taxable.\u00a0 A taxable investor is incentivized to sell losers before the calendar turns and wait until after the new year to sell winners.\u00a0 It defers taxes.\u00a0 Pension funds don\u2019t have that consideration so they can reallocate whenever they see fit without regard to year-end taxes.\u00a0<br><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another reason for my theory comes from an early experience of mine.\u00a0 One of the first big trades that I remember was a huge asset allocation trade in August or September of 1987. \u00a0I was new on the Salomon Brothers trading desk at the time, so I was only peripherally involved, but one of the states\u2019 pension funds (Maryland, I think)<a id=\"_ednref1\" href=\"#_edn1\">[i]<\/a> took advantage of the big rally in stocks and the plummeting bond market to reallocate across asset classes.\u00a0 \u00a0For those too young to remember, stocks were zooming throughout 1987 even as bonds were mired in a bear market.\u00a0 Stocks had risen about 20% in the first nine months of that year even as 10-year yields rose from 7% to 9.5%.\u00a0 The fund took advantage by selling stocks and buying bonds.\u00a0 \u00a0It proved to be a brilliant trade two months later when <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/happy-35th-birthday-fed-put\/?query=crash%20of%201987&amp;query_id=RVf7thTBSA-657ECRGY3pw&amp;index=engine-name-placeholder&amp;user_token=RVf7thTBSA-657ECRGY3pw\">stocks crashed in October<\/a> and yields plunged.<br><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The anecdote above by no means is meant to presage a market crash.\u00a0 But it illustrates my thinking.\u00a0 And by the way, in the time it\u2019s taken me to write this piece, stocks have recovered at least to Friday\u2019s lows.\u00a0 It\u2019s too early to count out Santa, even if we can\u2019t always count on him arriving on Wall Street.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-es-march-futures-2-days-2-minute-candles\"><strong><em>ES March Futures, 2-Days, 2-Minute Candles<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"611\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/12\/Picture1-25-1100x611.png\" alt=\"ES March Futures, 2-Days, 2-Minute Candles\" class=\"wp-image-216857 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/12\/Picture1-25-1100x611.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/12\/Picture1-25-700x389.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/12\/Picture1-25-300x167.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/12\/Picture1-25-768x426.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/12\/Picture1-25-1536x853.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/12\/Picture1-25.png 1909w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/611;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">&#8212;<br><a id=\"_edn1\" href=\"#_ednref1\">[i]<\/a> When I tried to check that assertion, I was unable to prove it conclusively.&nbsp; But the first graphic <a href=\"https:\/\/www.sra.state.md.us\/sites\/main\/files\/file-attachments\/cafr-2001-investment.pdf\">in this report<\/a> seems like the fund managers were taking a victory lap 14 years later.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The so-called Santa Claus rally refers to the market\u2019s tendency to rise during the last five trading sessions of a calendar year through the first two of the new year.  At this point, it might be something of a self-fulfilling prophecy, as experienced traders expecting the market to rise position for a bump.  <\/p>\n","protected":false},"author":4,"featured_media":117911,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[14700,6,8,9,22,26,3],"tags":[],"contributors-categories":[13576],"class_list":["post-216856","post","type-post","status-publish","format-standard","has-post-thumbnail","category-ibkr-market-insights","category-north-america","category-region","category-securities","category-stocks","category-text-articles","category-traders-insight","contributors-categories-interactive-brokers"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Santa Rally: Down but Not Out | Traders&#039; Insight<\/title>\n<meta name=\"description\" content=\"The so-called Santa Claus rally refers to the market\u2019s tendency to rise during the last five trading sessions of a calendar year through the first two...\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.interactivebrokers.com\/campus\/wp-json\/wp\/v2\/posts\/216856\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Santa Rally: Down but Not Out | IBKR Campus US\" \/>\n<meta property=\"og:description\" content=\"The so-called Santa Claus rally refers to the market\u2019s tendency to rise during the last five trading sessions of a calendar year through the first two of the new year. 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