Santa Rally coming to town?

Stock markets found some buyers amid low volumes and holiday liquidity yesterday, with the benchmark S&P 500 enjoying its best session in over a week.

The clue-chip index added close to 1.5%, likewise the other Wall Street indices in a session that got bulls talking about a Santa Rally.

What is a ‘Santa Rally’?

Market commentators tend to use the ‘Santa Rally’ term quite broadly to refer to either the entire month of December or a relatively longer time period.

But this term actually refers to the last week of December and the first two trading days of the new year. That is when markets increase in value.

Research shows that this single 7-day period has produced a positive return for the S&P 500 79% of the time. No other similar time period is more likely to be higher.

Of course, seasonality and calendar theories are not a guaranteed way to make profits as it is tough to predict what will impact markets in any given year.

But the January effect when institutional investors ready themselves for the new year to set up positions for the coming weeks can be a positive phenomenon.

These types of investors may also rebalance portfolios for tax-loss selling in December to close out losses, followed by repurchasing in January.

Why are stocks climbing this week?

The risk mood rebounded as US headline consumer confidence improved to the highest level since April while better-than-expected earnings from Nike and FedEx also helped boost sentiment.

That said, markets ignored more depressing housing data.

Existing home sales fell for a tenth straight month as the historic surge in US mortgage rate this year continue to pressure the US housing market. This theme may play out across the new year and slowly impact other parts of the economy.

With such macro data in mind, the S&P 500 has bounced off a Fib level (23.6%) of the market’s year-to-date declines.

The index is now toying with the 50-day simple moving average at 3893.4 as the immediate resistance level, with the 100-day simple moving average above at 3917.6.