J.D. DURKIN: Good morning, subscribers one and all. Mr. Bob Lang joins me now for a deeper look at a term we are about to hear a lot about over and over again. We're, of course, talking about Santa rallies, folks. Bob, thank you for being here. Start us off with explaining why you are a watcher of seasonality, especially this time of year.

BOB LANG: Thanks, JD. Great to be with you. Happy holidays. So listen, JD, seasonal trends [AUDIO OUT] simply by looking at historical moves by the markets. And we look at it from, say, a higher-level view of 30,000 feet. So we look at moves in markets during certain times of the year that show consistent, repeatable patterns that often, not always, happen in the same way over and over again. That, of course, is never a guarantee, and, of course, the disclosure of the past performance is never indicative of future performance or returns still applies, but the evidence is there from a historical perspective.

Now, that being said, we have had really poor outcomes during the seasonally strong period that we're in right now. And case in point, 2018 when the S&P 500 was down about 10%, it did rally back at the beginning of the year in 2019. But demonstrably, this year this time of year is very bullish. Nobody apparently wants to be receiving coal in their stockings for Christmas, especially on Wall Street.

J.D. DURKIN: Past performance is no guarantee of future results-- very important context. We say that many times.

Let's talk about the term "Santa rally." It was first used in the-- I learned this today-- it was first used in The Stock Trader's Almanac in 1972, but the concept, Bob, goes even further back. Essentially, we're referring to the market gaining 1% to 2% in the final five trading days of December and the first two trading days of January. The Stock Trader's Almanac found the rally occurred 58 times between the years 1950 to 2022. That's anywhere-- I think it's 75% to 80% or so, and yet naysayers are everywhere. Are you a believer? And if so, what makes you a believer, Bob?

BOB LANG: Yeah, I'm a believer in large data points. And so the numbers that you just spewed off there are huge data points in terms of time. The more data, the better confirmation that we have that that indicator seems to work. So 50, 60, 70 years of data is a pretty good amount of data to feel real confident that that indicator is going to work.

So I contacted my good friend Jeff Hirsch this week, who is the curator of that Stock Trader's Almanac, JD. And he tells the story of how his dad, the late Yale Hirsch, created this indicator back in 1972. And it seems to work pretty well. The rally period, of course, as you mentioned, covers the last five trading days of the year and the first two of the new year. So this year, that range is going to be December 22 through January 3, so it starts this Friday.

So you want to get long-- technically, the rule of thumb here is you want to get long starting on Friday and stay long all the way through January 3. Average gains over the seven-day period since 1969-- pretty respectable 1.3% gain for that seven-day trading period. But bear in mind it is not a trading strategy. It is simply an indicator. And when the indicator is down, the next year is often very challenging for markets.

And there's an old phrase that Gail Hirsch came up with-- again, the creator of the Stock Trader's Almanac and also the syndicator-- if Santa Claus should fail to call, bears may come to Broad and Wall. So that's pretty much the mantra that goes by if the market is not up during the Santa Claus rally period, the seven-day period.

J.D. DURKIN: Well, as you know, Bob, I work on the corner of Broad and Wall. So I'll have my binoculars ready to go to see if any bears are walking down here in Lower Manhattan. For those who are maybe actively investing for the first time this year, Bob, do you have any advice for those who are saying, where do I even begin? How do I navigate a potential Santa rally? What do you say?

BOB LANG: Well, remember something-- it's just an indicator. And some out there assume that the market is just going to rally because they hear the term "Santa Claus rally." And it doesn't happen all the time, as we discussed earlier. It's no guarantee that during this time frame, markets are going to rise. But sometimes, the market rallies for a short period and reverses. Other times, it's just a weak start and a strong finish during that period.

So a couple of years ago, the markets were down the first five days of that rally indicator, and then the next two days, which happened in the new year, the markets rallied sharply. And the markets were actually up during that seven-day period. So we really don't know when the markets are going to move up or down during that seven-day time frame.

Regardless, if we're watching the action of the markets and reacting to it, then it really does not matter what day or month it is. We simply have to make adjustments to those conditions.

J.D. DURKIN: Yeah, of course, we've still been in this era of the Jay Powell rally, which is kind of the kickoff to a potential Santa Claus rally, at least the last week or so. Bob, do you actively trade during this period of a Santa rally, or do you simply kick back and enjoy the gains?

BOB LANG: Well, for me, I think if we see a move to the-- if I have gains in the in the markets that we have into the end of the year, I may just sit back and wait until January gets underway. The trading desks start to thin out around the Christmas period, and we find volatility starts to play a big role in markets, which means large moves up and down. So we get we get very uncomfortable when the markets move in a big way up or down.

While volatility can be your friend during a period, it probably is not during this next couple of weeks. The calendar change is important in a year when the markets are strong. And if you can be patient waiting for that new year to get underway, JD, then all the better for getting started very quickly in the new year.

J.D. DURKIN: A bit of a follow-up-- it's also the season for tax-loss harvesting. Is there any kind of historical data or relationship between a Santa Claus rally and some of the tax loss harvesting that we tend to see in terms of these broader sweeping seasonality? It's the end of the year. Maybe people are looking at some losses, trying to help with their taxes for the new year. Because I feel like there are two different storylines, and investors may say, well, wait a minute, I think the timeline might overlap between these two annual phenomena.

BOB LANG: Yeah, so the tax-loss selling, JD, has been really going on since about October. And any days that we've had some pretty down sessions, I would probably have attributed that to some of the tax-loss selling that you talk about, referred to. I think with investors having some nice, robust gains in 2023, they probably want to offset some of those gains if they've booked those gains with some losses.

And we see that happen all the way up until the end of the year, probably the 29th, which is the last trading day of 2023. We often see that small-cap stocks have a lot of strength in the new year. But more recently, maybe over the past 10 years or so, the small caps have actually performed better about a month earlier. So we're in that time frame right now in December rather than January where small-cap stocks start performing very well.

And if you look at the Russell 2000 as a proxy for small caps versus all the other indices, like the SPY or the S&P 500 or the NASDAQ, we see that the Russell 2000 has actually been the better performer so far in December. So it kind of holds true to that notion that small-cap stocks tend to become more favorable. And, of course, with the drop in long-term interest rates, JD, that has also been helpful for small-cap stocks as well.

J.D. DURKIN: I'm really glad you mentioned the broadening now. We've had several sessions as of late. We follow IWM. We follow the overall Russell. We see they have outperformed the rest of the market. It doesn't happen always, maybe doesn't happen often, but there have been some notable sessions as of late. That has been the reality. We'll watch for that if that continues into the new year.

Bob, when we look at this year in particular, it's been pretty bullish leading into the Santa rally period, to say the least. Just days away from marking the calendar, as you've said. What kind of market setup are you looking at?

BOB LANG: I think we make a move, JD, to the old hold highs in the S&P 500. Of course, the Dow Industrials have already made a move through 37,000, has been trading up there for several days here. So that's already in new high territory. The NASDAQ is pretty close as well, Russell 2000 quite a bit of ways away.

But the S&P 500, which really is much more intriguing here and much more widely held by investors across the country and across the world, is much more intriguing here. So that old high level, JD, comes in at 4818. That's on the intraday high. Closing level, I think it was about 4810. So we're not too far away from that. We're less than 2% away. The S&P 500 is ticking up to about 4760, right now 4775, 4765.

So we're pretty darn close to that. I think that we're going to make a move up towards those old highs somewhere in the next couple of weeks. We only have eight trading sessions until the end of the year after today. And we may see a push through there and back down again, a push through there again and back down again. But there's certainly a lot of pressure to get into this market by investors. Certainly the last few weeks of 2023, that pressure has been mounting there. And money flows continue to show people who are late to the party and still want to get into the markets.

J.D. DURKIN: It is incredible to me how the days have just flown off the calendar, but here we are, 2024 right ahead of us. It's the season for seasonality. Thank you so much, as always, for the insight, Bob. Great to have you here. Wishing you the best for the holidays.

BOB LANG: Great. Thank you, JD. Great to be with you. Happy holidays to you.

J.D. DURKIN: Thank you. And before we leave it there for today, members, all of us here at AAP would like to wish each and every one of you a very happy holiday as well. And we will see you again soon.