Finally, A Retracement in the Markets

Perfectly timed for the "Santa Claus Rally"

Dec 21, 2023

Markets have been on fire.
We are finally getting a retracement.
Will Santa come to town?

Finally…

Well, it finally happened. The markets got hit this afternoon with a selloff.

Honestly, it’s about time. This has been one hell of an incredible run.

SPY (S&P500) gained 16.3% since the October lows less than two months ago. Likewise, QQQ (NASDAQ) gained 19.9%, DIA gained 16.44%, and IWM (Small Caps) jumped a whopping 25.05%. (Thank you, “January Effect.”)

To put the last two months into perspective, the average return for SPY, DIA, and QQQ is about 10% per year. About 8.5% for IWM.

I would say a down day of 1-2% is certainly warranted. To be honest, it was warranted a couple weeks ago but instead the markets just moved sideways before raging even higher. This has been a very strong market. A market which is doing exactly what it should be doing this time of year, only much much stronger than usual.

Psst. Want to really piss off your economic doom and gloom friends? Tell them that the NASDAQ and Dow Jones Industrial put in new all-time highs this week and that the S&P500 is only 2.5% away from doing so also. Then laugh and get new friends.

Seasonal Tailwinds

The stock markets are exhibiting the most strength at exactly the time of the year when they should be, and as of now it looks like the fun will continue until February.

The truth is a couple of down days would help more than they would hurt as Friday kicks off the “Santa Claus Rally.”

Meaning that if the markets cool off for a few days, it will be easier to have a positive return when we want Santa to come to town.

The Santa Claus Rally

You best believe he’s real. Afterall, he’s been delivering for the stock markets for years. According to Stock Trader’s Almanac, which is an absolute must have for traders, Santa has provided an average return of 1.3% since 1969. However, most people who cover and follow markets throw the “Santa Rally” term out willy-nilly in December as many have been doing this year. They are uninformed as the rally doesn’t technically begin until the open on Friday, December 22nd.

The Santa Claus Rally encompasses that last five trading days of the year and the first two trading days of the new year.

So why do those dates matter? Because, “If Santa Claus should fail to call, Bears may come to Broad and Wall.” Which is a fantastic little saying from the founder of Stock Trader’s Almanac, Yale Hirsch. It means if the markets are negative for those 7 trading days, from the opening bell on Dec 22 to the closing bell on Jan 3, then history suggests we might be in for a rough 2024. Like when Santa didn’t show and instead put us on the Naughty List throwing coal our way in 2000 and 2008.

So if you want a prosperous 2024, then best to believe in that Big Nick Energy.

Much will be revealed in the coming weeks.

Keep an eye on the markets over the next six weeks. Much will be revealed as to what to expect out of 2024 which will tell us what to expect out of the economy thereafter.

For the Santa Rally, keep in mind that markets do not need to return 1.3% or higher, they just can’t be negative. 0.0% or higher is a win. -0.1% or lower is an “uh-oh.”

Should the markets begin to faulter and not do as expected this time of year, that is really when everyone should start paying attention. When markets are negative at times they should be positive, it’s an ominous sign. Especially after the run we’ve just experienced.

But something tells me that this market isn’t finished just yet. We’ll get into that later, but for now you’ll just have to take my word for it and believe in the magic of Christmas.

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