You’d be mad to sell stocks in the next three weeks; here’s why

The mid-December trough in Aussie shares suggests the Santa Claus rally has arrived right on cue.

The mid-December trough in Aussie shares suggests the Santa Claus rally has arrived right on cue. Picture: Spencer Platt/AFP

After a two-week sell off, buyers finally swooped on the Australian share market on Tuesday.

The S&P/ASX 200 index had fallen five days running for the first time since April.

After tracking the US market up to a record high of 8514.5 points two weeks ago, its price-to-earnings multiple was looking a bit stretched at about 18.2 times 12-month forward earnings.

That was about 19 per cent above its long-term average valuation of 14.7 times.

Over the next two weeks it fell as much as 3.3 per cent while the US market went sideways.

But on Tuesday, the ASX closed up 0.8 per cent at 8314 points. It rose from a four-week low of 8236.7 to a two-day high of 8327.3, forming a so-called “bullish key reversal” pattern on the chart.

It also regained an important uptrend line as well as its 50-day moving average. That likely signals the start of a reliably strong period called the “Santa Claus rally”.

Santa Clause at the New York Stock Exchange. Picture: Bryan R. Smith/AFP

It’s typically the strongest trading period of the year, according to Bell Potter’s head of sales and trading, Richard Coppleson. Since 1980, the Australian market it has risen 84 per cent of the time for the three-week period from December 15 through to the fifth trading day of January.

The average rise in the local share market over these 15 trading days has been 2.82 per cent. However, when the market is up for the year – as it is now – it has averaged 3.86 per cent. And 25 per cent of the time it has risen 5 per cent or more.

Since 1995, the average gain when the market is up for the year has been 3.32 per cent.

The long-term average return from Australian shares, including dividends, has been 13 per cent.

Considering that the index has historically generated a few percentage points of its total annual return in this three-week period, it may be best to hold off on selling until early January.

Even then, liquidity is typically non-existent from mid-December until the February reporting season.

As for why the market is so strong at this time of year, Mr Coppleson points to a similar pattern in the US market. Unfortunately, most active fund managers underperform their benchmarks.

When the market is strong like it has been this year, they are inclined to top up their portfolios with outperforming stocks to catch up to their benchmarks. The S&P 500 is up 27 per cent year to date.

Holidays also affect the demand-supply dynamics of the share market.

Equity raisings dry up, but institutions are still taking in about $2.2bn a month of superannuation payments that tends to be invested immediately, mostly in shares.

Mr Coppleson has also worked out that $10.1bn in dividends from the three of the four major banks plus Macquarie Group are paid out to shareholders between December 16 and December 20.

Assuming dividend reinvestment plans for the big banks account for $1bn of that, he estimates that the actual cash – much of which tends to find its way back into the share market – is about $9bn.

Traders watch as President-elect Donald Trump walks onto the floor of the New York Stock Exchange with his wife, Melania, after being named Time magazine’s Person of the Year the second time on December 12. Picture: Spencer Platt/AFP

“Also throw that in with the $2.2bn of monthly inflows to super funds, and we see about $11.2bn of cash coming into a very “thin” market and all going straight into stocks via exchange traded funds or share price index futures,” Mr Coppleson said.

With most trading desks closing up shop from mid-December to late January due to the thinness of the market, there’s also a lack of trading that exacerbates the lack of liquidity and potential price swings.

“So in a ‘thin market’ in the second half of December and early January, if any shorts suddenly get worried and need to cover, it could be a nasty time for anyone too short,” he added.

Another consideration is the potential for bad news on the economy to be good news for stocks.

Bets on the amount of interest rate cuts next year increased after weak consumer sentiment data.

While it has recovered a long way from recessionary levels in 2022, consumers turned pessimistic on the economic outlook in December, according to the Westpac Consumer Sentiment Survey.

The consumer sentiment index fell 2 per cent to 92.8 points, after rising from 82.1 in the past year.

While consumers continued to report solid improvements in ‘current conditions’ – reflecting assessments of finances compared to a year ago and whether now is a good ‘time to buy a major household item’, this was more than offset by a loss of confidence on the economic outlook.

“That likely reflects several factors including: a disappointing September quarter national accounts update; ongoing uncertainty around inflation and the potential for interest rate easing; and a more unsettled global backdrop,” said Westpac’s head of Australian macro-forecasting, Matthew Hassan.

Westpac’s branch in Sydney's CBD. Picture: Brendon Thorne/Getty Images

All news topics were viewed less unfavourably in December than in September.

News on ‘inflation’ continued to dominate, with just under half of consumers recalling news on this topic. Assessments of news on other major topics – including ‘budget & taxation’, ‘employment’, ‘the economy’ and ‘interest rates’ – posted more material improvements.

While in September, an average of 72 per cent of consumers assessed news on these topics as “unfavourable”, that number fell to 60 per cent in December.

The ‘economic outlook, next 12 months’ sub-index fell 9.6 per cent to 91.2, while the ‘economic outlook, next 5 years’ sub-index fell 7.9 per cent to 95.9.

Both sub-indexes unwound about half of the rally seen over the previous two months.

It comes after September quarter national accounts data disappointed, with annual GDP growth slowing to just 0.8 per cent and private demand stalling flat over the last six months.

Originally published as You’d be mad to sell stocks in the next three weeks; here’s why