By Ron William, CFTe, MSTA

The Perils of

Frank Sinatra: Santa is Coming to Town

Frank Sinatra ‘The Voice’ once sang the 1934 festive classic “Santa Claus Is Coming To Town” and with Christmas almost here and the year drawing to a close, investors are eagerly anticipating the so-called “Santa Claus Rally” (SCR). But after many benchmark equities scoring their best month in November, and for several quarters, can we still expect a SCR rally in December 2023?

In a recent media interview, I argued the rally will likely be muted and that perhaps Santa had already gifted portfolio returns earlier during the US Thanksgiving holiday. Our global ranking model captured the broad tactical surge in risk proxies (Figure 1, 2, 3). US equity outperformance was not only led by another surge in growth-mega-cap, but also marginally broader participation from YTD laggards. Using a macro lens, this followed the rate unwind in US10YR, under its historic 5% threshold and the Fed’s “silent pivot”.

Global Ranking Model

Technically speaking, an oversold equity market reaction was also partly expected after the 3-month drawdown. However, the extent of this blow-off rally surprised most, including myself. Once again, we are reminded about the unpredictable nature of an irrationally exuberant market. What next? Recall the warning in Sinatra’s song: “You better watch out, you better not cry, you better not pout, I’m telling you why; Santa Claus is coming to town!” Indeed, many patently believe this holiday-inspired buying bias will still extend gains during the back-end of December into early new year, which typically leads to +1.3% gain and marginally stronger in pre-election years (Figure 4).

An alternative scenario proposed by Yale Hirsh, seasonality expert and author of the popular Stock Trader’s Almanac, is that “if Santa Claus should fail to call, bears may come to Broad and Wall” – that is, the value (Russell 2000) and blue-chip (DJI) stocks. According to historical studies the SCR seasonality pattern is often muted in overbought, flat or bear market regimes. Examples include 2000 TMT, 2008 GFC, 2021-2022 topping process and likely now (Figure 5, 6, 7), particularly into this latest setup.

Santa Claus Rally & Failed Historical Rhymes

S&P500’s blow-off rally is at a key inflection point, unwinding from +2STD overbought conditions (Figure 1). The market is further weighed by price resistance zone between 4560-4610 (trend-2021/22 top & July 2023 high). However, confirmation of a tactical reversal only occurs if price fills the recent exhaustion gap at 4460/20. FSC timing model signals risk into Q1 2024 (Figure 8 & 9).

S&P Blow-Off Rally at Key Inflection Point

Extreme Market Concentration Risk & Fragility

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Ron William, CFTe Bio

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Ron William, CFTe, is a market strategist and educator/mentor with more than 20 years of experience working for leading macro research and institutional firms, producing tactical research and trading strategies. He specializes in global, multi-asset, top-down framework, grounded in behavioural technical analysis, driven by cycles based on the "Roadmap" signature model of veteran market technician Robin Griffiths, published in his book Mapping the Markets.”

Ron also applies a "market & mind" approach at IntensiChi, using the latest techniques in behavioral-risk models and neuroscience sourced from expert groups. He further supplements with mentoring/coaching, trained by the International Coaching Federation (ICF), and teaches a regulatory approved masterclass in Applied Behavioral Science, with investment, private banks and CFA Societies.

Ron's primary work, as part of his current institutional market advisory firm (RWA), acquired global industry recognition as winner of “Best FX Research” in 2020. Financial media programs and industry publications regularly feature his market insights, including “Is the big cycle about to turn?”, predicting the 2020 crash and alerting the “Minsky paradigm” of 2020 H2-2022.

Driven by high-integrity education, Ron serves as part of the education committee of the International Federation of Technical Analysts (IFTA), Development Director at the Foundation of the Study of Cycles (FSC), Head of SAMT’s Geneva Chapter, and an honorary member of ESTA. He is also a visiting lecturer at universities, active guest speaker for the CFA, CAIA and CISI, and senior teacher at colleges offering an accredited diploma in trading and investing.