Korea Investment & Securities said the annual "Santa rally" has been losing steam, but in Korea KOSDAQ stocks tend to show strength at year-end compared with KOSPI. It also assessed that a reduction in short balance has a positive effect on the Santa rally.
The Santa rally is a term first used in the U.S. stock market in the 1970s, referring to the anomaly in which stocks strengthen during the last five trading days of the year and the first two trading days of January.
In the past, the probability of gains during the Santa rally period was around 70% to 80%, but looking at data from the past 10 years, performance has been weaker than before. In 2023, the Nasdaq Composite fell 2.5% during this period.
Also, KOSPI's performance during the Santa rally period has lagged the U.S. Yeom Dong-chan, a researcher at Korea Investment & Securities, said this is "because Korea has the ex-dividend event at the end of December."
KOSDAQ, which has a relatively low dividend yield, is less affected by the ex-dividend. Accordingly, Yeom said, "Investors who sold to avoid being designated as large shareholders tend to buy after the ex-dividend, so KOSDAQ is strong at year-end."
A reduction in short balance is also a factor affecting the Santa rally. Yeom said, "Investors who lent stocks try to repay them before the ex-dividend, when the shareholder registry is closed," adding, "As a result, in every December, Korea's short balance tends to decline."
In the case of short covering (closing short positions), it tends to appear strongly during the five trading days before the ex-dividend. Yeom said, "Ahead of the last week of the year, companies with a high short balance ratio and for which short covering can be expected could also be a short-term investment idea."