The stock market's 'Santa Claus rally' hasn't come to town yet - despite what you're hearing

By Mark Hulbert

Odds of a rally before Christmas are no better than at any other time of year - and maybe even worse

Santa Claus may bring a stock-market rally - but not yet.

Seasonal odds point to a down market until just before Christmas. Don't blame Santa.

The so-called Santa Claus rally didn't begin this week. The stock market's activity was a typical response when the Federal Reserve cuts interest rates - Santa had nothing to do with it.

Yet that's not how many in the financial media were describing the rally. These commentators are forgetting that not every rally in December can be credited to Santa. The stock market's odds of rallying before Christmas are no better than at any other time of year - and maybe even worse. Those contending otherwise are taking Santa's good name in vain.

This is illustrated by the chart above, which plots the average trailing five-day return for the Dow Jones Industrial Average DJIA in each trading session over the last three weeks of December. As you can see, the Dow's average return doesn't begin to jump until Christmas approaches, and doesn't become meaningfully above average until the last week of the year. (The data on which the chart is based begins in 1954, since up until 1953, the stock market was open on Saturdays. Including those prior years would have introduced an inconsistency into the chart's horizontal axis.)

Moreover, the Dow's average trailing five-day return is actually negative during the middle of December. We're just entering this middle-of-the-month period, which means that the seasonal odds point to a down market until just before Christmas. (Don't blame Santa.)

There also are theoretical reasons why the real Santa Claus rally doesn't begin until after Christmas. The primary cause of the rally is that tax-loss selling largely comes to an end by Christmas. Prior to then, including this week and next, it remains widespread. If the market bucks the downward pressure of that selling, as it did after the Fed's midweek meeting, it therefore has nothing to do with Santa.

The reason to belabor this point is that precision matters. Calling every year-end rally a Santa Claus rally is simply sloppy thinking. And sloppiness is never a good investment strategy, no matter the season.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

More: Yes, stock investors, there is a Santa Claus rally. No, it isn't coming early.

Plus: Stocks are selling off. Is it fatigue, or something else?

-Mark Hulbert

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