Due to the New Year’s Day holiday, this week’s update is an abbreviated version. We’d like to wish all our readers a very Happy and Prosperous New Year!
We’re still in the seasonal period of the Santa Claus rally, which, according to the data, and not the talking heads on TV, actually runs from the 22nd December this year (last five trading days of the year), through to the first two days in January, which will be Tuesday the 3rd and 4th.
The S&P 500 closed at 2260.5 on the 21st December and closed at 2236.25 on Friday 30th December. Therefore, we must see a rally by Wednesday’s close to at least 2260, or the Santa Rally will have failed this year. When the Santa Rally fails, the following year is often a bear market for stocks or a year where the markets move significantly lower before recovering. The saying on Wall Street is “If Santa Claus should fail to call, bear may come to broad and wall”. Let’s see what happens.
In addition to the Santa rally, we also have the January Barometer, which states that as goes January so goes the rest of the year in stocks. If stocks close up in January, the odds favour a stock rally for the year; if they end lower in January, the year is likely bearish.
There is also the January effect in EUR/USD, where there is a strong tendency for this market to post either its highest or lowest price of the year in January. Given that this is a key market and is largely impacted by the dollar, this will be an interesting pattern to monitor this month to see if it plays out. If it turns out that January is the high of the year in EUR/USD, we can expect this pair to go well below par before 2017 is up.
As ever, seasonalities are only tendencies based on patterns mined from market data. They do not always work, and some are much more reliable than others. It’s good to be aware of such patterns but far better to follow the trends in real-time and trade accordingly.