What Is a Santa Claus Rally?

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What is a Santa Claus rally?

This is when stocks see big gains around Christmas time and early January.

You're confused. Investors aren't stupid. They're not going to start buying stocks and getting optimistic because it's Christmas time.

And this is correct.

There are actually several reasons and theories as to why stocks can sometimes post strong gains during this time of year.

While one theory is that there's slightly increased optimism, a kind of subconscious optimism, during the holidays, there are other more compelling theories.

Firstly, consumers spend more during the holidays. This makes investors optimistic. Of course, the market already knows this and the real question is 'will consumer spend beat estimates?'

Secondly, institutional investors may sometimes sell some of their positions before the holidays, leaving most stock trading to retail investors, who can be very bullish. Of course, you'd see a slight downtick when many institutional investors sell.

To see how a smart investor should think about this, watch the video above. 

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