The technical anomaly popularly called the "Santa Claus Rally" describes the abnormal positive returns the market experiences in the last month of the calendar year. Logic would suggest that the optimistic behavior of market participants due to the holidays, combined with higher sales during the busiest shopping season of the year, justify the movement in stock prices, but shouldn't this seasonality be priced into the market already? After all, the New York Stock Exchange (NYSE) is one of the world's largest and most efficient markets with sophisticated, complex traders building events like the holiday shopping season into their respective models.
Since 1993, there have been only 4 occurrences in which the S&P 500 index has declined during December: 2007, 2005, 2002, and 1996. This effect even persisted through the financial crisis of 2008, when the market was down -34.99% through November and gained 78 basis points that December. Additionally, there were even five times when the market rallied in December, despite being down for the year: 2011, 2008, 2001, 2000, and 1994. So while we may not be able to explain exactly why this happens, over the past 20 years the market has gone up in December 80% of the time, which is a difficult trend to disregard in its entirety.
This year, however, investors are facing a monthly return through December 16 of -1.47% due to some profit taking on the part of investors and fears over upcoming anticipated unrest in Washington. There is a lot of buying to be done if Santa is going to pay a visit to Wall Street this year. Perhaps the outtakes of Ben Bernanke's last press conference of his tenure as Federal Reserve Chairman in December, the announcement of the beginning stages of Fed tapering and/or continuing positive reports related to the housing market recovery are just the catalysts that the market needs. If not, perhaps this will be a "Year without a Santa Claus"….rally, that is.