If you’re a bullish stock trader, it probably feels like Christmas has come early this year.
However, the rally we’re seeing isn’t driven by a jolly, rotund fellow in a red suit who lives at the North Pole; this rally was driven by a month of stellar earnings announcements and elevated expectations for strong consumer spending.
The question is… with stocks already moving as high as they have, can a “Santa Claus Rally” push them even higher?
Before we answer that question, we have to clear up a few things.
First, we have to define what we mean by the Santa Claus Rally.
The term was first coined by market analyst Yale Hirsch in 1972’s The Stock Trader’s Almanac. As originally defined, a Santa Claus Rally could occur during the period of time spanning the last five trading days of the old year and the first two trading days of the new year.
The performance of the market during these trading days is used by almanac traders as an indicator of how well the market is likely to do the next year.
According to Jeff Hirsch (Yale’s son), a strong performance during this period can be a good sign for the market, but “If Santa Claus should fail to call, bears may come to Broad and Wall” — the location of the New York Stock Exchange.
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However, since 1972, many analysts and commentators have been using the term “Santa Claus Rally” to cover the period of time from the beginning of December — or even as early as “Black Friday” — until Christmas. Apparently, they didn’t get the memo from Hirsch.
Next, we’ve got to decide which definition we’re going to use.
With all due respect for Hirsch, we’re going to stick with the new definition of the “Santa Claus Rally” for two reasons:
We don’t think you can really know with any degree of certainty how well the stock market is going to do during a given year by watching the performance of the market during a span of seven trading days.
The impact of the economic forces most closely tied with Santa Claus — shopping, shopping, and more shopping — is typically felt on Wall Street before Christmas, not after.
The short answer to the question “Can Santa still rally the market?” is yes.
For the long answer, let’s start by taking a look at the chain reaction that typically leads to a Santa Claus Rally on Wall Street.
Retail stocks are often the ignition switch that gets the chain reaction started; nearly 70% of the gross domestic product (GDP) in the United States is driven by consumers.
If consumers are confident in their financial future, they tend to spend more. The opposite is true if they’re concerned about their finances.
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At no time is this more apparent than during the holiday shopping season. This is the time of year when retailers tend to make the majority of their profits for the year. If consumers show up and spend lots and lots of money to play Santa, retailer stocks tend to rise.
This sends a signal to the rest of the market that consumers are confident and that economic growth in the U.S. should be strong. This then leads to other stocks in the market doing well with the expectation of a strong GDP, and voila: a Santa Claus Rally.
In light of all this, here’s how we approached our trading opportunities for this week.
We’re Focusing Solely on the Retail Rush
Rising retail sales in October and promising holiday sales projections are a positive sign that consumers are still willing to spend despite concerns about inflation and rising rates, and it confirms our bias towards retail stocks in the short term.
This week, we took advantage of this positivity and first recommended a strong player in the retail space. For this particular company, we expect sales to remain strong heading into the holiday shopping season, which should be supportive for the buyers we expect to move into the stock before earnings in December.
But we didn’t stop there.
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We targeted another retail titan that reported earnings this week and subsequently blew away expectations. While the stock did experience a bit of a selloff despite good news, that pattern has been fairly typical this season.
Regardless, we’re confident that this stock should continue to move in our favor.
To learn more about how you can get access to these plays, click here.
Profits From This Week
This week, our Strategic Trader readers had the chance to pocket two small profits on the following plays:
1.29% on Bank of America Corp. (NYSE:BAC) in 16 trading days.
0.26% on Southwest Airlines Co. (NYSE:LUV) in 15 trading days.
Income-based trading is more of the “slow-and-steady wins the race” than the kind of trades you may be used to seeing advertised.
However, many of those trades that promise something as gregarious as 1,000%-plus gains in two days are either extremely high-risk, or they’re leaving out some major details that disqualify the everyday investor from being able to participate.
The way we trade is methodical and calculated, and as you can see from a snippet of our 2021 closed positions below, smaller, shorter-term gains add up over time!
You can learn more about how we trade here — and how you can get ready for the next Strategic Trader trading opportunity before it drops.
We’ll be back with you Monday.
John Jagerson & Wade Hansen
Editors, Trading Opportunities