Ho, ho, ho. It’s not just Santa who chuckles like this, it is also every sensible investor – although the investor is not as jolly as Santa and his laugh will be tinged with cynicism rather than Christmas spirit.

Christmas is a particularly appropriate time for the stock market “Ho, ho, ho”, because for many years a phenomenon called ‘the Santa Rally’ – a period when the market rallies strongly in the run-up to Christmas – has taken place. It shouldn’t be happening, but it often does.

When I think of engineering and engineers I immediately see things through a market lens and that points straight to GE (General Electric), one of the quintessential global stocks. GE is now a Dow fallen angel, thrown out of the index after 122 years, but it was once a stock market leviathan. From a management point of view, it was – and probably still is – addicted to the Six Sigma management philosophy, firmly based around managing the normal distribution of outcomes through applying and tightening key process tolerances.

It is very interesting to view life as a probabilistic ‘crap shoot’ and proactively embrace that by trying to shift the odds in your favour. It’s a powerful tool, as I’m sure the ‘black belts’ of Six Sigma would tell you.

The stock market is also driven by normal distributions or, often, squished versions of them. The efficient market hypothesis and its allied random walk conjecture are driven by randomness and modelled with that in mind. The centre of option pricing, for example, has the normal distribution bell curve or variants as core. In turn, these prices affect a chain of financial market causality, so those who would refute the general randomness of markets really need to be sure of their footing.

Randomness breaks down when markets cannot operate properly. So if a bank presses the wrong button on one of their trading robots and it goes off on a selling spree, the period between that kicking off and it having its cord pulled is not especially random. It is, however, nested in randomness, for example the time taken for the soon-to-be-fired programmer to find his mistake and type ‘Ctrl-C’.

Randomness creeps into markets when times are inconvenient. A futures price for an index is not necessarily represented when the market opens, but give it a few moments and it will adjust as traders (likely robots) trade the differential away. It used to take five minutes but it probably takes 500 milliseconds these days. This is, of course, not a non-random opportunity you can catch, but you can guarantee someone can move fast enough.

Then there is another kind of timing event: the calendar event, an inefficiency because of the time of year. Markets have a habit of being weak in the summer because most markets are in the northern hemisphere and those lazy investing and trading blighters go on holiday. Activity slacks and prices drift with the slackness of lower liquidity. The saying is, “Sell in May and go away and come back on St Ledger Day” (the middle of September), and people really do.

This brings us to the Santa Rally, when stocks rise as Christmas looms. This could be random, of course, in the same way as you can flip a coin and have it come up heads 11 times out of 12 randomly without the need for a hidden mechanism. Yet it does appear very compelling that this is not a random event.

Why would this happen?

December is the end of the year and, rather like the way departments go on a budget-defending spending spree, fund managers go on a year-ending buying spree. This might be so they can report a high level of investing when in fact they were at much lower levels. They might do it if they were secretly very pessimistic about the markets. They might do it because they had hit a winning streak early on and decided to leave the table early and not have to worry about giving it back before the year end. It could be, and this is a favourite explanation, because they want to buy and drive up the price of the shares they hold so that the year end is flattering to their performance. The trouble with this idea is that it would mean a group in financial services was dishonest and sneaky – and that, obviously, could never happen!

Meanwhile, to top it all the period of the new year is meant to trigger the January effect where the direction of the first few days strongly indicates the direction of the rest of the year. It held true for many years but then disappeared, being pushed back by pre-emption into December and thence dissipating. This is how random is meant to strike back against market patterns. Once known, a pattern is traded into oblivion by the remorseless market.

For now, Santa is holding out against the ergodic powers and if you don’t believe me then you know what happens.

Santa won’t visit you this Christmas.

Ho, ho, ho. It’s not just Santa who chuckles like this, it is also every sensible investor – although the investor is not as jolly as Santa and his laugh will be tinged with cynicism rather than Christmas spirit.

Christmas is a particularly appropriate time for the stock market “Ho, ho, ho”, because for many years a phenomenon called ‘the Santa Rally’ – a period when the market rallies strongly in the run-up to Christmas – has taken place. It shouldn’t be happening, but it often does.

When I think of engineering and engineers I immediately see things through a market lens and that points straight to GE (General Electric), one of the quintessential global stocks. GE is now a Dow fallen angel, thrown out of the index after 122 years, but it was once a stock market leviathan. From a management point of view, it was – and probably still is – addicted to the Six Sigma management philosophy, firmly based around managing the normal distribution of outcomes through applying and tightening key process tolerances.

It is very interesting to view life as a probabilistic ‘crap shoot’ and proactively embrace that by trying to shift the odds in your favour. It’s a powerful tool, as I’m sure the ‘black belts’ of Six Sigma would tell you.

The stock market is also driven by normal distributions or, often, squished versions of them. The efficient market hypothesis and its allied random walk conjecture are driven by randomness and modelled with that in mind. The centre of option pricing, for example, has the normal distribution bell curve or variants as core. In turn, these prices affect a chain of financial market causality, so those who would refute the general randomness of markets really need to be sure of their footing.

Randomness breaks down when markets cannot operate properly. So if a bank presses the wrong button on one of their trading robots and it goes off on a selling spree, the period between that kicking off and it having its cord pulled is not especially random. It is, however, nested in randomness, for example the time taken for the soon-to-be-fired programmer to find his mistake and type ‘Ctrl-C’.

Randomness creeps into markets when times are inconvenient. A futures price for an index is not necessarily represented when the market opens, but give it a few moments and it will adjust as traders (likely robots) trade the differential away. It used to take five minutes but it probably takes 500 milliseconds these days. This is, of course, not a non-random opportunity you can catch, but you can guarantee someone can move fast enough.

Then there is another kind of timing event: the calendar event, an inefficiency because of the time of year. Markets have a habit of being weak in the summer because most markets are in the northern hemisphere and those lazy investing and trading blighters go on holiday. Activity slacks and prices drift with the slackness of lower liquidity. The saying is, “Sell in May and go away and come back on St Ledger Day” (the middle of September), and people really do.

This brings us to the Santa Rally, when stocks rise as Christmas looms. This could be random, of course, in the same way as you can flip a coin and have it come up heads 11 times out of 12 randomly without the need for a hidden mechanism. Yet it does appear very compelling that this is not a random event.

Why would this happen?

December is the end of the year and, rather like the way departments go on a budget-defending spending spree, fund managers go on a year-ending buying spree. This might be so they can report a high level of investing when in fact they were at much lower levels. They might do it if they were secretly very pessimistic about the markets. They might do it because they had hit a winning streak early on and decided to leave the table early and not have to worry about giving it back before the year end. It could be, and this is a favourite explanation, because they want to buy and drive up the price of the shares they hold so that the year end is flattering to their performance. The trouble with this idea is that it would mean a group in financial services was dishonest and sneaky – and that, obviously, could never happen!

Meanwhile, to top it all the period of the new year is meant to trigger the January effect where the direction of the first few days strongly indicates the direction of the rest of the year. It held true for many years but then disappeared, being pushed back by pre-emption into December and thence dissipating. This is how random is meant to strike back against market patterns. Once known, a pattern is traded into oblivion by the remorseless market.

For now, Santa is holding out against the ergodic powers and if you don’t believe me then you know what happens.

Santa won’t visit you this Christmas.