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4 Secrets of Santa Claus Rally: What does Statistics Tell Us?
Having studied many investments' performance in December I have collected 4 important things about Santa Claus Rally that are not commonly known.
A little bit about statistics
I had been observing the last 10 year's historical performance when I wrote this article. When I say XY's price was rising in 90% of the cases then it means 9 out of the 10 Decembers within the 10-year long period (this is called "relative frequency").
A stock with an average increase of 0.1% every December would show a rising price in 100% of the cases, yet you cannot earn too much money on it. So the other interesting number is the average increase in December.
Do not forget: statistics can increase your chances to make money but it is not a warranty for anything!
1. It does not have the same effect in each country
Major indices often show increase in many countries during Santa Claus Rally. However there is a difference even among the indices that usually perform well.
NASDAQ for example has shown an increase of 7 times during in the past 10 years with an average increase of 2.24%, but FTSE100 has increased in 90% of the cases and the average increase was 3.61% which is nearly 50% more.
There are some exceptions, too. HSI (Hang Seng Index) had risen only in the half of the cases (50%) which is not any better than tossing a coin!
2. Not all sectors are performing equally well
There are special sectors whose Santa Claus Rally performance is said to be better than others. For example many utilities or healthcare mutual funds usually perform well, but even within a good performing sector there are better and worse funds just like with the indices. The average yield in December is 3-4% in the case of a well-chosen mutual fund.
There are many sectors in which Santa Claus Rally seems to have less or no influence.
3. It does not apply to all stocks
Individual stocks differ from indices or mutual funds. Having studied the statistics of many stocks I found 3 major categories regarding their historical performance in December:
There are stocks that perform extremely well. Multiple stocks can be found that had risen in 90% of the cases with an average profit of more than 6%.
Though everybody talks about a "rally" there are also bad performer stocks whose price often fall in December.
The rest of stocks perform neutrally. These hardly show any influence by Santa Claus Rally: the chance of rising and falling is the same.
4. Differences between the types of investments.
The performance of an index or a mutual fund is usually an average of many underlying equities' performance.
If an individual stock is falling during the Santa Claus Rally, it may be compensated by other stocks in the index or in the fund's portfolio. If a mutual fund, an index and a stock has a 9 out of 10 statistics then a mutual fund or index may be a safer choice than the individual stocks
The effect of Santa Claus Rally is much weaker in the case of commodities and it seems completely missing in the case of currency market (forex).
How to choose a good investment for Santa Claus Rally?
I think there is no simple receipt to follow. From the statistical point of view, if somebody tells you "buy this or that kind of stock or mutual fund" it covers a lot of possible investments.
Among these investments you can easily bump into one whose statistics is not optimal. In worse case it may be a very bad choice.
Such advices are not to be followed blindly! Each investment should be considered individually.
The author, Szabolcs Kelemen has been investing his money himself for 10 years now. He has also studied Santa Claus Rally. If you want to find out more about Santa Claus Rally, visit http://www.chartoasis.com/blog/santa-claus-rally.html!