The holidays have arrived, which can be good or bad for your bank account depending on what you know about the phenomenon known as the Santa Claus rally.
For the past several decades, studies have shown that this time of year can have a much more significant impact on the national stock market than you might think.
So, what is a Santa Claus rally and how can you use it to your advantage?
Table of Contents
- 1 What is a Santa Claus Rally?
- 2 How to Take Advantage of a Santa Claus Rally
- 3 The Bottom Line
What is a Santa Claus Rally?
A Santa Claus rally is the effect around the end of the year when stocks tend to rise and create a healthier market. This makes it one of the best months to buy stocks for retail investors.
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What causes this effect?
Well, there are a number of potential explanations. For the most part, analysts seem to agree that it’s mostly due to tax considerations. However, bonuses and holiday cheer certainly aren’t hurting the market.
Do the Holidays Affect The Stock Market?
History would show that, yes, holidays definitely have an effect on the stock market. As stated above, it’s not exactly clear why holidays affect the stock market as much as they do. In most cases, the explanations are purely based on opinion.
One theory is that several large, influential investors take a break during this time of year and the market is left to retail investors.
In any case, historical trends show that the stock market tends to perform well during the end of the year and the beginning of the new year. Many analysts believe these effects are now being amplified by people trading in anticipation of a Santa Claus rally.
You should remember, though, that seasonal trends are not always consistent and should not be the sole factor in your trading strategy.
When Does the Santa Claus Rally Start?
Again, as pretty much no aspect of the Santa Claus rally is universally agreed upon, this question could have several answers.
Generally, it’s safe to say that the Santa Claus rally takes effect in the period between Christmas and New Year’s Day. However, some analysts use this term to refer to the period starting as early as Black Friday and ending at the beginning of January.
If you’re looking for specific dates to watch for, the Stock Trader’s Almanac by Jeffrey A. Hirsch refers to the Santa Claus rally as the final five trading days in December and the first two trading days in January.
Key Characteristics of Stock Market Holidays
There are a few signs you can look out for to see when the holidays are beginning to affect the stock market.
First, as you might expect, retail spending surges during this time. As stated previously, this is why some analysts consider the December stock market rally to really begin on Black Friday.
Furthermore, market optimism during the holidays tends to increase. You should watch for increases in the S&P 500, as this tends to be a good indicator of a positive Santa Claus rally.
Lastly, you might notice the market become more and more volatile as we approach Christmas. As the Santa Claus rally approaches, investors throughout the country often begin to trade in anticipation of the sudden jump expected to take place in the last week of December.
Pros and Cons of the Santa Claus Rally
For experienced investors, the Christmas stock market rally can potentially be a very profitable time of year. By using strategies such as stop orders, stop-loss orders, and other trading methods to minimize risk when making short-term trades, investors can realize great profits.
However, the volatile conditions created by a Santa Claus rally can make the market incredibly risky for inexperienced investors. Also, those who prefer to make only long-term investments aren’t like to be affected very much at all by these December stock market trends.
Aside from individual investors, a Santa Claus rally can have significant positive effects on the national market. The sudden rise in the S&P 500 can have lasting effects on the stock market throughout the year.
Historically, the long-term effects of the Santa Claus rally can be substantial.
Outside of the personal benefits you might be able to generate, a Santa Claus rally is often considered to be a good sign for the year to come.
Past studies have shown that if the S&P 500 rises in January, it’s much more likely to stay up throughout the entire year.
The good news is that, according to the Stock Trader’s Almanac (2018 Edition), the Santa Claus rally has only been down six times in the past 24 years. Of course, this means that the Santa Claus rally has typically lead to a healthier market in the following year.
The short-term increases in the market around this time of year can be great for bullish retail investors.
Short-term investors can learn how to take advantage of this seasonal effect to generate relatively significant profits. However, you should be careful not to get carried away in your holiday cheer, as there is, of course, still a risk when investing during this time.
Following the Santa Claus rally in January, the market can be incredibly volatile as trade activity surges, causing prices to rise and fall with seemingly no pattern.
While the short-term effects of these December stock market trends have almost always been positive, it can be dangerous for short-term traders looking to make a quick profit.
How to Take Advantage of a Santa Claus Rally
As we get closer to the end of the year, you might be considering making preparations to take advantage of this year’s Santa Claus rally.
If this is something you’re interested in doing, make sure to follow these tips to minimize your risk and create more opportunities to profit.
#1 Understand the Trader’s Mindset
First and foremost, you need to develop a trader’s mindset if you plan on being successful. You should be completely dedicated to analyzing stocks, developing a strategy, and making yourself comfortable with the fact that you might lose some money.
Develop a consistent routine that you follow day in and day out. For trading, in particular, there’s not a lot of leniency. If you’re not paying attention for one second, you might have missed your chance to make a profit. Sticking to a routine can help ensure your short and long-term success.
You also need to have patience but know when to cut your losses. Wait for the right opportunities to present themselves to you so that you can take advantage of them. Don’t simply jump on the first opportunity you see — wait for the best one.
Developing a disciplined trader’s mindset is crucial for success, especially when trading during a volatile time like this.
#2 Trade Against Stock Promoters
If you want to be successful not just during this time of year, but in your trading in general, you need to be able to complete your own analysis. Don’t depend on stock promoters to help you put together your strategy!
Stock promoters work by buying into a stock early and attempting to artificially inflate prices through promotion. However, as soon as the price rises, the promoter is going to dump their shares and leave you to fend for yourself.
Instead, do your own research. See how the stock you’re considering performed during the last few holiday seasons.
Whatever you do, just remember, that stock promoters aren’t really trying to help you. This is one of the most common trading mistakes made by new and experienced investors.
#3 Stick to Your Trading Plan
A trading plan only works if you make sure to follow closely. Breaking your own rules isn’t going to help you. All it’s going to do is increase your risk.
You should predetermine what stocks you plan on trading, how much you’re willing to lose, how much you expect to make, what resources you’re going to use, how you’ll react in case of unexpected circumstances, and much more.
Stock indicators are a fantastic tool to help you analyze stocks and determine which ones will be a part of your larger strategy.
Indicators are primarily designed to help investors analyze short-term price movements. While they may not be useful for long-term investors, people looking to make potentially quick profits during the December stock market rally should absolutely consider using them.
Stock Chart Patterns
To pick the best stocks possible for your Santa Claus rally trading strategy, you’re going to have to get comfortable with stock analysis.
Stock chart patterns can be analyzed to help you understand how a stock has behaved over the course of the last year and how it has responded to annual Christmas stock market rallies. This can help you determine what stocks perform particularly well during the holidays.
#4 Use Stock Screener Software
One of the easiest and most efficient ways to find the best trading opportunities during the Christmas stock market rally is to use professional stock screener software.
Many of the best traders in the world depend on the exceptional charting software offered by StocksToTrade to help them find the right stocks.
Signing up for StocksToTrade Pro before the end of the month is a great way to help you make the most of the coming Santa Claus rally.
The Bottom Line
December can be a great time of the year for the stock market. As optimism increases and retail investors chase trends, the stock market often experiences a yearly bump around the holidays.
Investors who know what to expect from this rally can sometimes reap attractive benefits. However, even if it doesn’t happen, a Santa Claus rally is still something to be happy about because it often leads to a healthier market in the following year.
Happy holidays … and good trading to you.
Has a Santa Claus rally helped your trading? What happened? Leave a comment and share your story!