Should You Wait for a Santa Claus Rally this Year?

The “Santa Claus rally” is a term used by market enthusiasts to refer to the strong surge in prices, particularly in the stock markets, that takes place during the last week of December until the first few days of the following year. Thanks to intermarket correlations, this phenomenon can also be observed in the forex market.

If you’re thinking that this could be your chance to grab a lot of pips before 2011 comes to a close, bear in mind that the Santa Claus rally will take place only if you’ve been an angel all year.

I’m kidding!

There’s no need to worry if you’ve been naughty or nice because this market phenomenon is usually spurred by people spending or investing their Christmas bonuses, tax considerations, the anticipation of a market rally the next year, and the general feeling of holiday cheer. Plus, the pessimists probably needed to take an early vacation from all the worrying they did all year, which means that those in the bull camp are free to be jolly!

Don’t believe me? Have a look at these EUR/USD snapshots taken at the end of 2009 and 2010:

EUR/USD: December 21, 2009 – January 6, 2010

EUR/USD December 2010

EUR/USD: December 20, 2010 – January 3, 2011

EUR/USD December 2009

So if the Santa Claus rally took place for the past couple of years, can we expect the same thing to happen again this year?

Before you start getting all wide-eyed and giddy, you should know that some market gurus believe that the Santa Claus rally came a bit early this year. If that’s the case, you probably missed it because analysts think it already happened a few days ago when the central banks’ joint easing was announced. Better keep those milk and cookies in the fridge then!

Besides, downbeat global growth prospects combined with persistent economic threats such as the euro zone debt crisis could keep bears in control for the rest of the year. Despite efforts by the central banks to stimulate the economy, coordinated or otherwise, it can’t be denied that the possibility of a euro zone break-up or the chance of another recession are still on the table.

With plenty of dark clouds on the economic horizon, will the Santa Claus rally still come to town on the last week of December this year?

For now, it really is tough to tell. As I always say, these are unprecedented times and it’s hard to predict what’ll happen next. With that, it’s crucial to pay attention to risk sentiment and the dominant market themes for the last few weeks of this year. If it helps, make a list and check it twice!