The Santa Claus Rally Phenomenon:
A Santa Claus Rally is a surge in the price of stocks during the month of December, or more specifically, the last week of the month between Christmas and New Years. There are a handful of reasons why this end of year rally can occur, but some of the widely accepted reasons have to do with happiness around Wall Street, people investing their holiday bonuses, and the fact that pessimists are usually on vacation that week.
The Santa Claus Rally is oftentimes followed-up by what’s known as the January Effect, which suggests that there’s typically an increase in buying during the month of January as people buy back the positions they sold in December for tax-related reasons. The Santa Claus Rally and January Effect are interconnected – in anticipation of the January Effect, some individuals will position themselves in investments and/or trades in the last week of December, thus adding to the Santa Claus Rally.
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