The stock market is about to open today for the first time after Christmas in what turns out to be a special day for the world’s most famous index. As it turns out, the S&P 500 index has been down more than 1% only once since 1950.
In other words, out of 71 years, it happened only once that the index lost more than 1% on the first day after Christmas. So what are the odds that it will happen today too?
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S&P 500 rejected at resistance
The US stock market bounced in October as expectations that the Federal Reserve would slow down its interest rate hike pace came true. Since then, the index bounced 500 points but failed at resistance in the 4,100 area.
Previous support turned resistance, and sellers jumped in. But on its recent decline, the S&P 500 index found buyers at 3,800.
It looks like the 4,100 area is pivotal, and judging by the historical odds, today might be a green day for the index.
Should we expect a Santa Clause rally?
The Santa Clause rally is a calendar effect. It means that the stock market tends to rally in the last five trading days of December and the first two trading days of January. However, it is just a bias.
Between 1950 and 1971, stocks gained about 1.5% during the days mentioned above. Hence, investors always expect stocks to rally in the last trading week of the year, but it doesn’t mean that they do so every year.
With only one trading week from December left, investors hope the Santa Rally will come this year. The problem is that if December ended today, it would be one of the worst December ever for the US stock market.
With one trading week left, December is on track to deliver a negative return of more than – 4%. It has only happened four other times since 1950.
Interestingly, in three of the four December, the stock market recovered and delivered positive returns from one to twelve months. Only 1968 was an exception.
To sum up, the S&P 500 starts today a week part of a calendar effect, and stocks tend to rally. Given the negative returns in December so far, the odds are that stocks might, indeed, rally in the last trading week of December.
