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Do bull markets ever die in December?

'Santa Claus Rally'-obsessed investors are too bullish this month.

  • By Mark Hulbert,
  • MarketWatch
  • – 12/11/2013
  • Market Analysis
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CHAPEL HILL, N.C. — Here's today's cheerful factoid: No bull market of the last five decades has come to an end in December.

Unfortunately, a longer term perspective paints a less happy picture: The number of bull markets that die in December actually is not statistically different than average.

I bother to point this out because investors tend to be particularly bullish during December. You may be guilty of this bullish bias yourself, since almost all investors appear to have already shifted their attention to 2014. About the only time anyone is focusing on December anymore is to ask when the so-called Santa Claus Rally will really kick in.

Investors' December bullish bias also is evident statistically. Consider the average recommended exposure among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). Since 1990, the HSNSI has averaged nearly nine percentage points higher in December than in the other 11 months of the calendar. This difference is quite significant from a statistical point of view.

But is this bullish bias justified?

No, for at least two reasons. The first comes from contrarian analysis, which holds that the consensus is usually wrong. I have confirmed this contrarian insight in my own research by documenting that the stock market tends to perform better following low HSNSI readings than after high ones.

But there's another reason to question investors' December bullish bias: Upon focusing on a long-enough swatch of history, we find that bull markets die just as often in December as they do at other times of the year.

To show this, I relied on the precise definitions of bull and bear markets that are employed by Ned Davis Research, the quantitative research firm. Since 1900, according to the firm's definitions, there have been 34 complete bull markets. (We're in the 35th currently.)

It turns out that two of those 34 bull markets ended in December: The one that ended in December 1961, and the one that ended in December 1968.

On the grounds of pure randomness, of course, you'd expect an average of 2.83 bull markets to die in any given month. December's total of two is well within the range of being entirely average.

None of this means that the current bull market will end this month. Just because it could doesn't mean it will.

But this review of the history suggests that investors may be getting a bit ahead of themselves in blithely assuming that the bull market couldn't end this month.

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Copyright © 2013 Dow Jones & Company, Inc. All Rights Reserved.
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