As the name suggests, a Santa Claus Rally is when the stock market indices move higher. In fact, according to The Almanac Investor, the S&P 500 has averaged a 1.6 percent gain during this period since 1969. (The time period associated with the Santa Claus Rally is the last five trading days of December and the first two trading days of January.)
Of course, the time period associated with the Santa Claus Rally does not always see a rally in the stock market, and many investors believe these years are particularly ominous. In fact, many investors believe the years following the years in which there is no Santa Claus Rally are most likely going to be bearish years.
The Almanac Investor has a great little saying for this: "If Santa Claus should fail to call; bears may come to Broad & Wall."
What Causes the Santa Claus Rally?
Nobody really knows what causes the Santa Claus Rally. However, some of the following popular beliefs explaining why the stock market goes up seem to make their rounds each year: