Every year during the winter holiday season, traders and investors participate in an exciting event, the so-called Santa Claus Rally. It is the period of unusually strong gains in the financial markets typically seen during the final five trading days of the year and the first two trading days of the following year. The S&P 500 has gained an average of 1.6% and yielded positive returns about 75% of the time since 1969 during the Santa Claus Rally periods. The experts give several explanations for the appearance of this phenomenon.
What triggers the Santa Claus Rally?
Market growth is observed for exactly one week every year. So, what are the factors that contribute to the Santa Claus Rally? What’s so special about December?
- Investors engage in tax-loss harvesting to offset realized capital gains. To do this, they massively sell unprofitable stocks and buy back identical assets. As a result, weak stocks grow as well as the strong ones.
- On winter holidays, major institutional investors take a vacation and leave the market. This reduces the bearish activity and stimulates purchases on the part of mutual funds, which seek to fill their investment portfolios.
- Market participants search for the most promising assets to replenish their investment portfolios. As a result, the profitability of value stocks rises. Such stocks are more attractive for long-term investors who seek to reinvest the profit received from these assets.
How to trade the Santa Claus Rally
There are many strategies that can be used during this period. Since the rally only lasts one week, investors tend to opt for short-term strategies.
Let’s take an example of a strategy that will perform well during the Santa Claus Rally. An investor buys an asset five days before New Year’s Eve and then sells it on the second day of the new year. You can expect an average return of 1.5% on your trade. It’s important to account for high volatility and sudden price spikes that may occur during this period. You should strictly adhere to money management rules and set limit orders to protect yourself from potential losses.
Intraday strategies with orders placed on hourly time frames will work well during the Santa rally. Take long positions and close them before the rally ends.
Which companies to pick for investment?
To earn money from the Santa Claus rally, choose the companies that stay especially busy during the holiday season. Before the pandemic, the leaders were restaurants, travel agencies, cinemas, recreation centers, shopping malls, etc. But the pandemic and global restrictions have altered people’s lifestyles. Now, you should take a closer look at food delivery services, online stores, and streaming services as more promising investment opportunities. These businesses thrive while offline companies are barely making ends meet.
When to jump aboard the Santa Claus rally?
Before you join the rally to grab your slice of that profit pie, you should make some preparations. Find a suitable online broker and register a trading account with it. Download a trading platform and install it on your device. If you don’t have enough time to sit at your computer desk all day long, we recommend downloading a trading app that will allow you to trade on the go. Most brokers offer mobile trading applications. For example, you can download an app from AMarkets global broker. It’s an excellent app with great functionality.
Once you’ve selected your broker and opened an account, pick your trading instrument. A stock index, such as the S&P 500, will do. Select it from the list of available instruments in your trading platform and open a long position. It is important to remember that this needs to be done during the last two weeks of the outgoing year. Wait until the rally comes to an end, and don’t forget to close your position in time.
This article provided by AMarkets.com: “Providing brokerage services in Latin America, Asia and CIS, AMarkets focuses on offering high-quality services and comprehensive support to its clients and partners. Our professional team is committed to finding innovative solutions and introducing new technologies so that AMarkets clients from all over the world could get the best trading conditions. Our experts take an active part in various industry conferences and events, where they discuss trends and prospects of financial markets.”