The Hindu Business Line : Santa Claus effect

Merry X'mas! And while you are celebrating, remember that Santa Claus has an effect on the market as well, if history is anything to go by. In fact, this effect is a consequence of another phenomenon called the January effect that was first observed in the US. If you are an active trader, this effect may be of importance to you.

So, besides the gifts on X'mas, what does Santa Claus give to the market? Years ago, experts in the US found that the market declines in December and moves up in January. After some research, these experts concluded that this phenomenon could be due to tax payments.

Traders typically sell their loss-making positions in December and set off such losses against gains from other transactions. They tend to buy back these shares again in January.

If you knew that such a phenomenon occurs in the market, what would you do? You would obviously want to buy shares in December when they decline and sell in the first week of January when they move up.

Well, after the January effect was documented, that is what traders did. Sure enough, the demand for shares in the last week of December led to the market actually moving up in December instead of January.

And since this phenomenon occurs during X'mas week, the experts aptly called it the Santa Claus effect. There is a moral in knowing the January effect and the Santa Claus effect. As a trader, you should not buy or sell a stock to capture such effects. What if large players start buying shares to capture gains due to the Santa Claus effect? The market may move up in November and somebody may label that phenomenon as the Thanksgiving effect!

(The author is Head, Research, Navia Markets.)

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