What is the Santa Claus rally?

Alright, it’s time to believe once more…

Father Christmas doesn’t just stuff your stocking.

Oh no, he’s often also responsible for a stock market rally. (And what more does a bullish trader want than a December rally to pay the Christmas decoration bill….)

So what is the Santa Rally and is it true?

It is said that there’s often a bullish rally in equities during December. And in true trader nickname fashion, this got coined the Santa Claus rally.

Sadly, however (in typical trader fashion) no one agrees on the exact dates.

Some say it starts on Christmas day and continues until the 2nd Jan.

Others say it happens in the week leading up to Christmas Day.

Theories as to why this happens include:

• Tax arrangements
• Hope and optimism during Christmas
• Trying to lock in annual bonuses
• Santa has a bunch of call options on the S&P

All are valid…

But does it hold any weight?

Well, let’s start with December in general.

According to this Forbes article, in the past 20 years, the S&P 500 has closed higher in December 17 times.

It also suggests that around the middle of the month, is historically the best time to start getting long. December 15th or so.

Perhaps it’s traders getting ready for Santa’s arrival…

CME Group notes that over history in December the S&P 500 returns 1.37% on average.

They also mention that the last 4 days of the trading year and the first two of the next year bring larger-than-usual gains. (That’s our Santa rally right there)
Suggesting we have rallied 67% of the time over the past quarter century.

Ok so the numbers look good, what does that mean for us traders?

Well, not many of us are going to buy in December and come back in Jan to see what happened.

But we might consider only trading from the long side during December.

If the technicals are in an uptrend and there’s a historical tendency to push higher too, the best course of action for a daytrader/swing trader might be to just keep looking for great long entries and stay clear of shorts.

Using the assumption that the rally will hold and the seasonal trend will continue.

Now of course anything can happen right?

The data is just showing us what happened over history, but that doesn’t mean it will continue. And even a few down years wouldn’t affect the theme…

Maybe you’re thinking “Cool story bro. I don’t believe in Santa anyway, where’s my sell button?”

And you might well be right, there may be room for some nice two-way trading over December.

But I always like to know what traders are watching and try to understand what they may be thinking…

Who knows what will happen?

Manage the risk, be aware of the bigger themes, and let’s end the year strong.