What is a Santa Rally?
A Santa Rally is the term used to describe the regular phenomenon of stock markets going on a stronger than usual bull run over the period directly leading up to Christmas and New Year. It seems to happen all over the world, with the term originating on Wall Street, but the Santa Rally phenomenon has been particularly consistent in the UK and for the FTSE 100. Between 1985 and 2015, the FTSE 100 rose 83% of the time over the late-December to early-January period, with an average gain of 2.26% over December. Last year, despite a lot of speculation 2016 would be a gap year for the Santa Rally, it turned out to actually be a particularly long and strong one. The FTSE 100 gained 8.63% on an upward trajectory between December 2nd and January 13th.
Why Does the Santa Rally Happen?
The statistical consistency of the phenomenon is such that the Santa Rally can’t simply be written off as a piece of stock market folklore. However, unfortunately for online stock trading enthusiasts there is no definitive explanation of why it happens which would make whether it will take place on any given year easier to predict. There are almost certainly several factors that all influence whether or not a Santa Rally will take place or not, the combination of which must be right on any given year.
Among the most likely influences that contribute towards a Santa Rally are:
Positive sentiment, or seasonal cheer, among professionals and individuals investing online contributing towards them being more willing to buy around Christmas.
Lower volumes of trading as the holiday season approaches
Portfolio rebalancing by big institutional investors such as fund managers
People investing their Christmas bonuses in online stock trading
Pre-empting the ‘January Effect’ for bargains – another phenomenon that often sees stock markets rise in January
Self-fulfilling prophesy, however, may be the strongest Santa Rally influencer. If indices start to show gains in December, online investors presume a Santa Rally is on and also buy into the market, pushing indices to further gain.
When Do Santa Rallies Start?
There is no clear answer to when a Santa Rally will start and it does vary from year to year. Anyone researching Santa Rallies online will see a variety of conflicting opinions from different sources, many of whom are very authoritative. Some experts consider that a Santa Rally can start from the beginning of December while others say before the last week prior to markets closing for Christmas it’s not really part of a Santa Rally.
Last year the UK’s biggest online CFDs and stock trading platform, IG Group, did a little research on the Santa Rally and ran some numbers in an attempt to get to the bottom of this opaque question. The brokers number crunching boffins looked at historical data for the FTSE 100 and S&P 500 on every possible combination of potential Santa Rally timeframes between 1986 and 2015.
The results demonstrated that both indices had seen the biggest average rises from the 14th to 16th December. Investing online from those dates until the first few days of the New Year would have brought an average return of 2.53% and positive gains 87% of the time. The average return over the first half of December was negative at -0.23%.
That said, it is different every year and sometimes, like last year in 2016, starts early, sometimes later and sometimes the phenomenon skips a year. Unfortunately, it is only possible to say which dates a Santa Rally has occurred between when it is already over.
Will there Be a Santa Rally in 2017?
That said, is there any way to assess at least the likelihood of a Santa Rally in any given year? Those investing online in the stock market will naturally be wondering if they can potentially take advantage of a Santa Rally this year. As already mentioned, it’s impossible to predict a Santa Rally with any real accuracy and its occurrence becomes clear once it is already underway with no guarantee things won’t quickly turn around.
Stock markets in both the UK and USA, as well as much of Europe, have had a very strong year generally, on a more or less constant bull run. Record highs have been set with consistency throughout the year and the markets are anticipating a correction at some point, though no one knows when that will happen. Many analysts believe equities are currently overpriced and values have been driven up by central bank money printing with loose monetary policies in place in the U.S., UK and EU over the past several years.
Even if we are in something of a bubble, stock market bubbles often go through a potent parabolic phase before popping, which could mean that until a downturn does take hold we could still see a further period of strong gains. And the 2017 trend has been very much a case of ‘onwards and upwards’. At least for now, barring any significant correction over the second half of November, there are no strong indications that a downturn in the major indices is imminent, which means there looks to be a decent chance of a Santa Rally this year, though of course there is no certainty.
How to Trade the Santa Rally
Online stock trading focused on individual companies is not really the best option as there is a far greater likelihood of not choosing the right companies to take best advantage of gains. The only way to really trade the Santa Rally is through taking a position on a major index such as the FTSE 100, S&P 500, Nasdaq or Dow Jones. It’s almost certain that if one of these indices enjoys a Santa Rally, they all will, though there could be variation in the extent of gains.
With Santa Rallies forming in 83%+ of the years since 1985, trading for a Santa Rally would be considered trend trading and working to the assumption that there is a strong likelihood markets will move up. One option, probably the only sensible one, is to take a position for a Santa Rally every year in the hope that the phenomenon continues to manifest itself more often than not. A loss will be taken when a Santa Rally doesn’t happen but will be more than compensated by the majority of the years it does. So as long as losses on years the Santa Rally skips are sustainable, trading the trend consistently every year should result in profits. Unless of course the trend reverses in future years and Santa stops visiting the stock markets altogether, which is possible!