What Is The Santa Claus Rally and How Do You Trade It?

Jitanchandra Solanki
17 Min read

At the end of every single year, both traders and investors gear up for a unique phenomenon in the markets called the 'Santa Claus rally.' Over the years, there have been many different interpretations of this unique event in which the S&P 500 stock market index has averaged a gain of 1.6% with positive returns more than 75% of the time since 1969.

However, the most interesting part is that the phenomenon has also caused some very interesting seasonal based moves at the end of each year in other asset classes. This is why knowing what the Santa Claus rally is, why it works and how to profit from it is essential in ending the year strong! Read on to learn more. ▼▼▼

What is the Santa Claus Rally?

The Santa Claus rally is a term used to describe the seasonal tendency for the stock market to rally higher during the Christmas period. In the past, this tendency has also been called the Santa rally, December effect or Turn-of-Year effect.

The Christmas stock market rally also fits into the broader group of the Holiday effect. There are strong seasonal tendencies around all the major holidays for reasons that will become apparent when we look at the causes of the Santa Claus rally.

So when exactly is the Santa rally? Is it the whole of the month or just a few days of the month? To understand this phenomenon better it is important to understand the history of the Santa rally first and then look at the price chart of the stock market during this phenomenon!

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Will there be a Santa Claus Rally This Year?

The first evidence to be produced regarding a stock market Santa Claus rally was in 1942 when S.B Wachtel presented it in the Journal of the Business of the University of Chicago. The analysis showed that there tended to be a rise in the stock market (using the Dow Jones Industrial Average index) from December to January from 1927 to 1942.

Since then, there have been many variations of the Santa rally, but the most popularised version and the one that still stands to this day is the research done by Yale Hirsch in 1972 and presented in the 1973 Stock Trader's Almanac. Hirsch discovered that the stock market rallied within the last five days of the year and the first two days in January.

The chart below shows the change in percentage of the S&P 500 stock market index during the last five days of the year and the first two days of the new year:

Source: Data calculated from S&P 500 Index E-mini Futures Continuous Contract from TradingView, 20 December 2021

When it comes to analysing the Santa Claus rally statistics, it is clear to see that there is a tendency for the stock market to rally during this period of time. Of note was the Santa Claus rally 2018 which performed well. While 2014 and 2015 were down years, the average of the 2008 to 2018 period is still positive.

However, it's important to note that the founder of this phenomenon, Yale Hirsch, would use this as a barometer of what could happen for the next year. The theory suggests that if the Santa Claus rally does not happen then the next year has a higher chance of being flat or negative. However, if the Santa Claus rally did happen, there is a higher chance of the next year being positive. 

This is interesting when looking at the Santa Claus rally 2020 period for the S&P 500 stock market index. In the chart below, the last five days of 2020 and the first two days of 2021 are highlighted between and including the two red dotted vertical lines. It shows that the Santa Claus rally started on the very first of the five days with a big push higher on the second day. The remaining days of the year traded relatively flat before a volatile first day of the new year followed by a positive second day of the new year. 

Source: Admirals MetaTrader 5, SP500, Daily - Data range: from 29 Oct 2020 to 7 Apr 2021, accessed on 20 Dec 2021 at 10:36 am GMT. Please note: Past performance is not a reliable indicator of future results.

The Santa Claus rally worked in 2020 and the next year also ended positive but with some wild swings on the way higher. It is interesting that there is a seasonal tendency during this period of time. Before going through how to trade the opportunity, let's first understand why this tendency happens.

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Causes of the Santa Claus Rally

There are a variety of different reasons why there is a seasonal tendency for the stock market to rally at year-end and over the Santa Claus rally's seven-day period. Some include:

▶️ Tax-loss harvesting is when investors sell stocks at a loss at the end of the year to offset capital gains tax. This means they are buying back their positions in the market causing weak stocks to rally higher which will naturally push up the strong stocks on momentum flows.

▶️ More people are also on holiday during this period of time which means many large institutional investors will not be at their desks. This could result in less active short sellers being present in the market, leaving long-only algorithms for mutual funds to keep buying the dips for investors' portfolios.

▶️ End of year bargain hunting also takes place as investors focus on what to put in their portfolios for the next year. This is why value stocks can have a tendency to outperform towards year-end as investors bank gains on growth stocks and put some back into value stocks which present a greater reward to risk over the long-term.

▶️ It could also just be a self-fulfilling prophecy! Traders and investors are always looking for an edge in the market. While year-end optimism, investing of bonuses or any of the other reasons listed above could explain the phenomenon it could also be because the tendency was first found in 1942! As it has been around for so long, investors anticipate it and react to it, thereby keeping the phenomenon intact!

Whatever the reason, it is there and important to know about. So what are the possible trading opportunities around it? Let's take a look! ▼▼▼

Santa Claus Rally Trading Strategies

There are a variety of ways traders can take advantage of the Santa Claus rally. However, because the Santa Claus rally is over seven-days, it lends itself much better towards shorter-term strategies.

For the most part, the simplest method would be to buy on the first of the last five days of the year and then close out at the close of the second day of the New Year. The problem is where do you put a stop loss and how do you risk manage the position? While history shows the period averages a positive 1.5% gain, there could be some wild swings to the downside on some occasions.

Many traders may then decide to look at the seven-day period of the Santa rally on a lower timeframe and employ day-trading type strategies try to identify bullish price action patterns, or technical trading indicators to support buying during a period where history shows there is a tendency to have more buyers than sellers.

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The chart below shows the lower timeframe four-hour chart of the S&P 500 stock market index during the Santa Claus rally period in 2019.

Source: Admirals MetaTrader 5, SP500, H4 - Data range: from 13 Dec 2019 to 14 Jan 2020, accessed on 20 Dec 2021 at 11:36 am GMT. Please note: Past performance is not a reliable indicator of future results.

The highlighted yellow box on the chart above shows an example of a popular candlestick trading pattern called an Inverted Hammer. It is a pattern that is usually found after a downtrend and one which traders would take as a signal for a trend reversal.

Traders could also add technical trading indicators to look for further clues of buying. In the example above, at the time of the Inverted Hammer the Stochastic Oscillator was below 20 which is considered oversold and where the market may push up.

In this instance, traders could simply have an entry one point above the high of the Inverted Hammer with a stop loss one point below the low. This would have resulted in a possible entry price of 3226.50 and a stop loss at 3211.15. If trading 10 lots, then this would result in a potential loss of -$153.50. If the trader targeted the next swing high point at 3251.54, this would have resulted in a profit of $250.40.

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What Happens Before and After the Santa Claus Rally?

Some longer-term traders and investors may look at the period that leads up to the Santa Claus rally, as there is a seasonal tendency for stock markets to start rising from October. Below is a chart showing the average trend of the last 20-years ending in 2020 for the S&P 500 stock market index.

Source: EquityClock, 20 December 2021

This shows that there is a strong tendency for the stock market to rally from October all the way to the end of the year. This could be due to many reasons such as traders being more active in the market to end the last quarter of the year well, more optimism around the holiday period creating more revenue for different companies, etc. Whatever the reasons, the pattern is evident.

In this instance, traders may take a longer-term approach and start to build positions in stock markets from October to the end of the year. This could involve looking at the daily timeframe charts and utilising more of a swing trading style. As the market tends to rally during the end of the year and into the Santa Claus rally dates, both traders and investors may start to build positions in anticipation of higher prices. 

The S&P 500 index seasonal chart above also shows that the January period can be quite volatile and leans more towards the bearish side from the middle of the month. This is important to know from a trade management perspective as you don't want to hold your positions over a weaker period of time. Traders may use trailing stop losses to help maximise gains and minimise losses on a potential move lower. 

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Below is a screenshot of the indicator showing all the possible trading opportunities on the S&P 500 index for short-term, medium-term and long-term positions taken on 21 December 2021:

A screenshot showing an example of searching for 'SPX' in the Trading Central Technical Insight Lookup indicator from Admirals Premium Analytics.

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How to Trade the Santa Claus Rally in 4 Steps!

Once you have a potential trading setup, either through your own research and analysis or through the actionable trading ideas in the Technical Insight Lookup indicator, you can place a trade in just four steps, as shown below:

  1. Open your MetaTrader 5 trading platform provided by Admirals, or start your free download here.
  2. In the Market Watch window (Ctrl+M), type in the instrument you want to trade and select it from the pre-populated list.
  3. Drag the symbol onto the chart and open a trading ticket by pressing F9, or using the right-click options.
  4. Fill in your stop-loss and take-profit levels, and volume amount, then either press Buy if you believe the market will rise or press Sell if you believe the market will fall. Done!

A screenshot showing the Admirals MetaTrader 5 trading platform with a trading ticket open on the chart.

Why Trade the Santa Claus Rally with Admirals?

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✅ Begin trading on the popular online trading platform MetaTrader for PC, Mac, Web, Android and iOS operating systems, provided for free by Admirals.

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About Admirals

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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