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0 Nov 30 2012 @ 2:30pm by Matt Smith in Blog, Crude Oil, Economy, Global Energy

Olympic Donuts And The Santa Rally

For some reason, an oddball story this week about a man and some Olympic-themed donuts struck a chord with me.

To overcome his fear of repeatedly being turned down for investment in his technology start-up, Jai Jiang decided to make at least one crazy request a day for one hundred days, with the goal of becoming accustomed to rejection.

Now I’m not sure whether I liked this story so much because it echoes one of my favorite quotes by Winston Churchill (‘success is the ability to go from one failure to another with no loss of enthusiasm’), or because of how the tale gives a renewed faith in the human spirit.

For on just the third day of his one hundred day mission, Jai Jiang made a ridiculous request at Krispy Kreme donuts for an Olympic-themed array, only for employee Jackie Braun to accept and complete his order in the 15 minute time limit. I highly recommend watching the video of this unfold (and also liking the Facebook page ‘Give Jackie at Krispy Kreme a Raise‘).

From this seemingly random starting point, this propels us off into Commodityland™, as Jai Jiang’s mission reminds me of the oil market as we head into the holiday period: despite the current failures faced (…an impending fiscal cliff and debt ceiling, an ongoing slow-motion car crash of a European debt crisis, a weakening fundamental backdrop…), against the odds we may well still see oil prices lifted by a Santa rally…….or will we?

But let’s take a step back for a moment.

Financial markets are a fickle animal: they can be moved by the most incidental of details. Just as a sunny day can uplift the human spirit, and an increase in mosquito bites or missing pets can indicate we are in a downturn, financial markets are no omission from such incidental trends.

To name a few examples, a sporting loss can apparently predict the performance of the stock market for the next year (The Super Bowl Indicator…80% success rate), while the old adage to ‘sell in May and go away’ draws on the fact that equities historically have performed better in the period from November to April (see chart below) rather than May to October. But while their correlation cannot be denied, this does not mean one causes the other (correlation does not imply causation).

But somewhere just beyond these incidental relationships is a gray area where correlation and causation intertwine, to morph into self-fulfilling prophesies. Which brings us to…the Santa Claus rally.

This phenomenon occurs in December, and is generally considered between Christmas and New Year’s Day, when equity markets rally for a number of potential reasons: thin trading , a holiday spirit on Wall Street, or people investing in anticipation of another quirky indicator – the January effect.

So let’s join the dots.  

Given that the whole foundation of this blog is built on the belief that asset classes such as equities and commodities are influenced by each other, and given there have been a number of recent studies (such as this and this) which declare there to be ever closer ties, it makes sense to consider whether what is good for the goose is good for the gander: does a Santa rally for stocks basically mean a rally for oil?

In a word, no. Although both equities (S&P500) and oil have rallied six and seven times respectively for the last ten Decembers (financialization of commodities has only truly developed in the last decade), they have only moved in the same direction for three of those ten years.

As for the period between Christmas and New Year, both have only rallied half the time, while only moved in the same direction four out of ten years.

WTI crude oil (black) vs S&P500 equity index (red), 2002 – present

So what does this tell us? Well, that its recent record makes the Santa rally less of a predictive indicator than the Super Bowl. It also tells us that a rally in equities (or a sell-off for that matter) will not necessarily imply the same fate for oil.

This brings us back round a full circle to Jackie Braun, Jai Jaing, and his pursuit of abject failures. Although it is unlikely that the fiscal cliff discussions and the Euro debt crisis will be an abject failure over the coming month, it is just as unlikely that either will reach an uncompromisingly successful resolution.

We seem set for a period of ‘muddling through’ for December, and one thing is for sure…oil will show a strong correlation with this.

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