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Santa Claus Rally's Secret: the 3 Types of Stocks You May not Know About

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by: No more debt !
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Date: Mon, 12 Nov 2012 Time: 10:05 PM
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I have heard a lot about Santa Claus Rally but I hardly found any article with exact statistics of it. So I decided to make a simple study about it.

Let the numbers speak!

I have studied a lot of stocks' historical behaviour in December to see how they perform during the Santa Claus Rally.

There were two things I calculated for each stock:

  • Relative frequency of increase tells how often the stock yielded positive return in December. This can be expressed as a percentage of the total number of occurrences during the month of December. (See "Frequency of increase [%]" on the chart below – 88% in the example: positive yield 7 times for the past 8 years.)

  • Average yield in December. (7.26% in the example below)

    An example monthly statistics chart. December is highlighted for Santa Claus Rally.

The three types of stocks

Having studied a lot of charts similar to the one above I realized that stocks can be categorized into 3 main types regarding Santa Claus Rally.

  • There are good performing stocks. These stocks very often provide positive yield during December. ("Often" means positive return eg.: in more than 80% of the cases.)

    Example monthly statistics chart of a stock that performs well during Santa Claus Rally

  • Though everybody talks about a "rally" in December, it is a more interesting fact, that there are also bad performing stocks, for which December is rather a disaster. The monthly yield of these very rarely go above zero in December. (Eg.: in 25 % percent of cases).

    An example chart of stock that performs badly during Santa Claus Rally.

  • The rest of stocks perform neutrally regarding Santa Claus Rally. The price of these stocks rises and falls with similar frequency.

    A stock's monthly statistics that performs neutrally.

Tricky numbers

Understanding relative frequency may not be so obvious.

  • One might think that if a stock's price rises in 50% of cases that is quite a good value. (Though it is not 100%, it is far from 0%, isn't it?) Well, it is not. Think about this: if a stocks's price rises in 50% of the cases, than it is falling in the rest of the cases which is also 50%. So neither falling nor rising seems more likely – just like tossing a coin.

  • What about the relative frequency of 75%? It also means that the price only falls in the 25% of the cases. So we can say that the price rises 3 times more often (25%*3 = 75%). In case of 90% it means that the price rises 9 times more often!

The Secret of Santa Claus Rally

So the secret of Santa Claus Rally is that it does not apply to all stocks. This is also true for mutual funds and indices.

Knowing if a stock often rises in December or not is the key to good profits during the Santa Claus Rally.

Good to know...

It must be noted however, that past behaviour does not represent any guarantee in terms of future performance.

One must also make sure to use enough data for statistical analysis. (Stocks that have been traded for 1 year only may show an impressing 100% for frequency of increase but it means nothing!)

About 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://chartoasis.com/blog/santa-claus-rally.html !


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