Christmas is approaching, and with it the theme of the so-called “Santa Claus Rally” becomes relevant. In this article, you will learn:
What is Santa Claus Rally?
Yale Hirsch was among the first to document the Santa Rally. In 1972, in The Stock Trader’s Almanac, he analyzed data from 1950 to 1971 and noted that the S&P 500 was up 1.5% on average over the seven-day pre-Christmas period.
This is how the term “Santa Claus Rally” appeared among traders. What is it?
The Santa Rally is a particular example of seasonal fluctuations in financial markets. Traditionally, for the end of December and the beginning of January, stocks grow in price.
To be more precise, it is generally accepted that the Santa Rally falls on the last 5 trading days of the outgoing year and the first 2 trading days of the New Year.
According to Investopedia in this period in recent years:
- the dynamics of the S&P 500 has been positive in 15 out of 20 years;
- the S&P 500 averaged 0.7% growth.
A similar trend can be found in data analysis since 1950: the S&P 500 has risen 1.3% on average and has been positive 79% of the time.
It’s definitely more than the average return index.
LPL Research and FactSet (in the chart above) show that the S&P-500 stock index tends to rise in the second half of December. At the same time, growth is especially pronounced if the previous November was marked by a decrease in the index.
Overall, December tends to be one of the strongest months of the year for the US stock market. Since 1926, only July and April have outperformed the December index, about 1.9% and 1.7% versus 1.6%, respectively.
According to Bloomberg, Santa Rally is also showing up in the foreign exchange market. For example, you can notice it when analyzing the average change in the EURUSD exchange rate for each month.
5 Possible Reasons for the Santa Rally
It is impossible to name the exact reason for the start of the Santa Rally. Experts identify several growth drivers. It is possible that each of the drivers contributes to the stock market’s overall growth to a different degree.
The most likely reasons for the Santa Claus Rally are:
- The Tax Optimization. Investors are waiting for the first days of January to buy stocks and thereby reduce payments, which are levied from the stockholders at the end of the year.
- The trading volumes are decreasing. It is easier for the stock market to move on its own course, which is usually directed upwards.
- Investors receive bonuses. And they invest more actively in their favorite stocks.
- Holiday atmosphere. The fears are dispersed. People make decisions to buy stocks as holiday gifts.
- Professional investors take a vacation. And professionals are more likely chose bearish behavior, while ordinary retail investors usually only buy and hold.
The pros and cons of the strategy
The trading strategy on Santa Rally is simple – buy on Christmas Eve and sell early in January.
Strategy pros
- Simple. Wait for December and buy.
Strategy cons
- The signal comes very rarely – only once a year, and the position holding time is limited to one week. The rest of the time the capital “does not work.”
- It usually takes a lot of effort to pick a good entry point.
- Statistics from the past do not provide guarantees for the future.
Besides, if you’re really going to buy stocks on the eve of Santa Rally, you should think about placing protective stop losses – it makes things a little more difficult.
Is it worth counting on gifts from the stock market?
All investors come from childhood. Perhaps they have expectations of Christmas miracles alive. However, the harsh reality is that the financial market is a highly competitive business where everyone has the goal of making money: retail buyers and sellers, institutionals, hedge funds, brokers, market makers, etc.
Therefore, we recommend acting not in expectation of a miracle, but based on proven strategies. In particular – to apply trading methods based on volume analysis.
We can consider the 2021 S&P-500 futures chart, as an example.
The sharp decline on December 19 may have spooked those looking to buy stocks in anticipation of Santa Rally. However, if you pay attention to the volume histogram on the cluster chart, the session closed above the volume accumulation. And this is a «bullish signal», which can be regarded as a sign that the Santa Rally will take place.
Conclusions
If you really need gifts from Santa, don’t rely on the financial markets, but take part in the ATAS company’s holiday promotion! Don’t miss out on huge discounts, the chance to win a Lifetime license and other surprises valued at €150,000+. New Year’s Eve is the best time to become a license holder of the ATAS trading and analytical platform, a professional volume analysis tool.
Download ATAS if you haven’t already. There are four significant reasons for this:
- You will be able to analyze trading volumes on the stock markets, futures and cryptocurrencies.
- The ATAS platform has a built-in demo account, so you can practice trading without risking real capital.
- The ATAS platform has a Replay function — a history simulator designed to speed up trading training.
- The platform offers many advantages for traders who want to trade using convenient cluster charts and useful indicators.
Read our blog and subscribe to the YouTube channel — learn how to use the arsenal of ATAS tools to gain a real advantage in the market and develop your own strategy.
Information in this article cannot be perceived as a call for investing or buying/selling of any asset on the exchange. All situations, discussed in the article, are provided with the purpose of getting acquainted with the functionality and advantages of the ATAS platform.
