Bullish stock-market investors should put away the cookies and milk. It’s still too early for a so-called Santa Claus rally, cautioned analysts at Ned Davis Research in a Wednesday note.
Bullish sentiment, as measured by a pair of NDR indicators, is in the “excessive” zone, which can serve as a contrary indicator and could feed into the stock market’s seasonal tendency for a weak first-half December performance, wrote Ed Clissold, chief U.S. strategist, and London Stockton, research analyst.
The research firm’s short-term NDR Daily Trading Sentiment Composite, which includes more than 20 indicators including market-derived sentiment gauges such as the Cboe Volatility Index
VIX
and polls of institutional and retail traders, recently hit it most optimistic level since July 25 and remains at an optimistic 76.7, they wrote.
NDR’s crowd sentiment poll, which uses many of the same indicators but has a more intermediate-term outlook, returned to optimistic territory for the first time since August.
The improved sentiment follows the S&P 500’s
SPX
8.9% November jump, which marked the large-cap benchmark’s best monthly gain since July 2022 and its sixth best November going back to 1926. Stock-market gains in November were fueled largely by a retreat in the benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
from a 5% high in October. The rise in sentiment to levels that can signal a potential pullback is in line with the stock market’s seasonal tendency for weakness in the first half of December, Clissold and Stockton wrote.
They noted that weakness may come as a surprise to investors who are aware that November and December historically offer the best back-to-back stock-market performance.
Blame it in part on hype over the “Santa Claus” rally, they said. The term is used to describe a narrow window of trading days around Christmas.
Some on Wall Street use the term more loosely.
“admire many shoppers lamenting stores displaying Christmas decorations in October, technical analysts fume over the misuse of the term Santa Claus rally,” Clissold and Stockton wrote.
The term is often used to refer to the market’s tendency to rise over the final five trading days of a calendar year and the first two trading days of the following year, though there are a “few versions” of the indicator, they noted.
In the table below, they break down the S&P 500’s performance in the five trading days before and after Christmas, which shows the index rising an average of 0.59% in the pre-Christmas period and another 0.87% in the five days after Christmas, compared with a 0.17% average gain for all five-day periods since 1972.
Ned Davis Research
But it could be all a setup for a happy holiday season.
“A seasonal pullback that relieves short-term optimism could set the stage for a Santa Claus rally,” they wrote.
