Why Santa Claus Isn’t Coming for Tech This Year

Why Santa Claus Isn't Coming for Tech This Year

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

December isn’t as bullish as its reputation suggests
The month’s best-performing sector isn’t what you expect
Expect profit taking in tech stocks this month
These are the December tech timebombs to avoid
Plus, one standout winner

Are you excited for the Santa Claus Rally?

For generations, traders have looked to December as the start of a so-called Santa Claus Rally. The jolly guy in red is supposed to drop some of the year’s best monthly returns for the S&P 500 under the Christmas tree.

And when you look at the long view of history, that’s correct.

Going back to 1950, TradeSmith’s Seasonality software shows that December is a close second to November for the best average monthly return for the S&P – at 1.7%. It’s also been positive more than 77% of the time:

Not to burst any yuletide bubbles, but it’s important to remember two things about seasonality – the study of regularly recurring price patterns across the year…

Seasonal trends can be powerful, but they’re not a crystal ball…

For example, the S&P 500 closed this November just barely higher, at 0.1%. That’s far short of the seasonally bullish pattern, which has seen the index run an average of 1.9% higher going back to 1950.

While the month closed in the green, there was great deal of volatility along the way this year. At one point, that took the index down as much as 4.4%. That’s a clear break from the seasonal pattern.

And it’s not the only example of seasonality going askew this year. The weakness that usually manifests in September didn’t show up this year. Instead of falling for the month, as it typically does, the S&P 500 rose 3.5%.

Seasonality shows you the historical odds of a bullish or bearish pattern occurring during a specific time of the year. But just because something has happened a lot in the past doesn’t mean it’ll happen again in the future.

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It’s also important to consider the timeframe you use…

The study above looks at S&P 500 returns going back 75 years. On its face, more data sounds better. But markets have changed a lot over the years, and especially since the turn of the century… and the trends have changed along with them.

Notably, the last 15 years have seen a surge in retail investor trading. With the only barrier to entry now being an internet connection and a couple hundred bucks, retail trading in 2023 made up 20% of all market volume, up from 10% in 2010.

Retail investors tend to shoot first and ask questions later. Many of them are complete rookies who tend to move in crowds and react to headlines. That’s helped the market grow a lot more volatile in recent years.

Another key difference is that technology companies have dominated the stock market in the 21^st century.

Back in 1969, there were more than 166 industrial sector companies in the S&P 500. As of 2019, that number had shrunk to 70.

At the same time, the number of companies in the Information Technology sector has exploded, with just 16 back in 1969 vs. nearly 70 of them today.

That means, when doing seasonal studies, there’s a strong argument for focusing on this modern era of high retail investor participation and larger tech influence.

And when we look back just 25 years, dating from the dot-com days, the picture changes. While still strong, December isn’t nearly as strong as it used to be:

This century, December’s average return drops to 1%. And it becomes the third-best performing month of the year, after October and November.

Just as Christmas seems to come earlier every year at Home Depot and Costco, it seems to be the case in markets as well. Looking to January, we see that returns drop off even more – with an average return of just 0.4%.

Now, let’s look at December’s seasonality on a sector basis…

Staying focused on the past 25 years, let’s run the numbers on each of the major market sectors and see how they’ve done every December this century.

You could make an argument for buying into the Materials ETF XLB. It’s been up 72% of the last 25 years for an average return of 3.8% during its positive Decembers. Accounting for losing years, it’s tied with Health Care (XLV) for the best average return overall at 1.5%.

But when it’s been a down month, the average loss has been 4.6%. So there’s risk here, too.

Another sector that stands out is Technology (XLK). It’s been up just 60% of the time over the last 25 years. And across winning years, it’s shown an average return of about 3%.

But looking at down years only, the average loss is close to 6%. That gives us an average return (including winning and losing years) of minus 0.5%.

This tells us that December is generally a time of profit-taking in technology stocks.

That may have to do with the trend of tax loss harvesting, where trades cut losers ahead of the new year to lock in capital gains losses that will offset their winners.

Or it may be due to the belief that December is a seasonally a good month for stocks, while January tends to be more muted. Getting out while the getting’s good, so to speak.

Either way, it suggests that Santa Claus isn’t coming for tech this year.

Now, let’s look at individual Technology stocks... which confirm the tech sector’s seasonal weakness:

These numbers help flag some stocks to avoid.

My eyes dart down to Apple (AAPL), which has been up less than half of the time and has on average lost about 5% overall. On years when it’s down, it tends to shed more than 15%.

And look at Nvidia (NVDA). That’s been up just a little more than half the time but falls 17% on the years it’s down.

Broadcom (AVGO), however, is a standout winner. That’s been up 86.7% of the time since it’s been publicly traded for an average gain of 11.6% on those winning years.

As we said up top, Seasonality is just one piece of a puzzle. But these numbers reveal that investors tend to fade the biggest winners so far this year – technology – and favor the materials sector.

That helps you narrow down your trading plan for the month using TradeSmith’s software.

Why Santa Claus Isn’t Coming for Tech This Year