Has our bearded man in red grown too old and tired to deliver?
It is that special and magical time of the year that traders look forward to with anticipation and excitement.
For much of the last century, stock and – even more so – indices have got into the habit of raising during the days around Christmas and traders, naturally, have got into the habit of making the best out of it all. But is Santa Claus Rally still a thing nowadays and will Santa come to Town this year?
To find out, we would need to re-examine price movements in the past and take a look at some numbers. Good job we are here to do just that.
Right, let’s get to it then!
FIRST THINGS FIRST: When do Santa Clause rallies happen and what are they exactly?
Historically speaking, during the days around Christmas, stock prices seem to increase more often than not and, when they do, they tend to increase way more than they usually do.
In view of this, Traders are known to open positions in advance hoping to be rewarded with the kind of returns that can make their Xmas that little extra special.
With regards to timing, there are different schools of thought on when each Santa Claus Rally should be expected. While a majority of traders would confidently point to the last five trading days preceding Christmas and the two days that follow it, many others would swear that the ‘special week of gifts’ is actually between Xmas and New Year’s eve. Of course, we also need to consider that, contrary to popular belief, Santa’s sleigh cannot cross the Atlantic in just one night and this might be why some of the European traders believe that their time to shine doesn’t arrive until the first trading week of each new year.
All considered, it is undeniable that New York’s Wall Street is the stock market center of the World and it’s only fitting for the US market to remain the focus of the rest of this article as well as analyzing only the trading days before New Year’s fireworks and champagne.
Usually, the week after Christmas sees market makers and most institutional traders either on vacation or packing their bags for it. This is the only time of the year when retail traders are kings and queens and have the market virtually all for themself.
Volume is lower than it normally is but retail trading alone can still create volatility and – without wolves of Wall Street there to stuff their own turkeys – opportunities are plentiful and up for grabs.
With so many “bells jingling all the way”, lights, festive decorations and wild magical reindeer roaming the streets, it’s no wonder retail traders end up causing prices to rally. They – like everybody else – feel in good spirits, generally happier and more optimistic and hopeful while wondering what the new year might bring. Also – one might say – after spending a whole day in a room with their entire extended family, it’s no wonder very few traders wait until the 1st of January to find out. No, sir. If it is a weekday, the 26th of December marks the beginning of what many consider to be Santa Clause Rally’s week.
But… is it?
The true Santa Claus Rally
Records show that despite frequent rises in prices between the 26th of December and the 2nd of January, the market does feel the absence of volume and of the huge institutional capital. There is money to be made, sure, but, although frequent, earning opportunities are mostly limited in size. We are talking about price movements, in other words, that might just be enough to “make spirits bright” and maybe – just maybe – even enough to afford that “one-horse open sleigh” but… almost certainly, not the horse too.
Records also show that for the horse – and possibly much more – real opportunities exist when institutional money is at play. It seems only logical then that the five days before (when Institution traders are still in the market) and the first two days after Xmas (when retail sentiment creates support and further pushes prices up) often see bigger movement and bigger returns than the week that follows it. This is why the vast majority of traders have been calling this the “Santa Clause Rally” since way before retail trading could even exist.
No one is absolutely clear on what the reasons for these festive rallies really are but it is generally thought that the spectrum of possibilities goes from a general sensation of optimism to tax-related management operations to end-of-year bonuses re-invested in the market.
Be as it may, the critical questions are:
Is the Santa Clause Rally an event reliable enough to base a strategy on it? And are we going to have one this year?
That’s right! Is Santa real and is he coming to town? Yes or no? This, ultimately is what it all comes down to and to answer that, time has come to look at some numbers.
Since 1928, the S&P 500 has provided an average daily R.O.I. of around 0.2%. During the same period, however, it has given a whopping average daily R.O.I. of around 0.24% during Santa Clause Rally’s days (the last five days before Xmas and the first two days after).
It might not sound like much at first but to put it into context…
$10 million invested in the S&P500 during any average 7-day period would have made -on average – $14,000 in those seven days whilst the same investment during any 7-day Santa Clause Rally period would have made, on average, $170,000.
That’s a difference of £156,000 in just 7 days. Now, that’s impressive!
As far as reliability goes, since 1921, Santa Clause rallies have brought positive returns 78% of the time so… wow, looks like Santa might exist, after all, right?
Well, here’s another set of numbers we should look at.
If we take into consideration only the last twenty years, the numbers seem to paint a slightly different picture.
The average return for the entire Santa Claus Rally 7-day period dropped from 1.68% to 0.95% while the average return of any other week has increased during the same period making any difference marginal.
Out of the last twenty years, the Santa Claus rallies have provided positive returns 13 times, negative returns 5 times and no change twice.
Positive returns, however, averaged +1.58%, whilst negative ones averaged around -3.28%. The highest gain for the 7-day period has been a return of 5.4% in 2021 and the biggest loss was -10.7% in 2008.
So… yeah, there is that.
Conclusion
Yes, sure, I know; that last part sort of ruined it a bit. It was scary and traumatic enough the first time we had to hear that Santa Claus didn’t really exist. And now this. Seriously, you couldn’t make it up!
Given the figures, personally, I would stand clear of recommending to anyone changing and adapting their strategy – even less so, creating a new one – based on a Santa Claus Rally. Data from the most recent years seem to suggest minimal gains at best and, at worst, large losses maybe also aided by a hint of market manipulation from the last few smart money traders still in the office.
Well, I don’t know who is going to tell all the children now but, in light of all the evidence presented, it seems safe to me to assume that Santa Claus has stopped caring and that he has either taken a very long break or thrown in the towel.
Everyone will come to their own conclusion. It is only right that it should be so and for all intents and purposes, that is what this is; just the author’s conclusion and not much more.
As always, trade only what you can afford to trade, and place money and risk management at the center of what you do.
Hope this helps and… yeah, good luck with the kids.
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