The Santa Claus Rally

The term “Santa Claus Rally” was first coined in 1972 by Yale Hirsch in the Stock Trader’s Almanac, and refers to a tendency of the stock market to rally in the last few days of the year into the first couple days of the following year. Since monitoring this phenomenon, historically, the S&P 500, Dow Jones Industrial Average and the Nasdaq Composite had risen about 80% of the time during this period for an average of 1.3%, 1.4% and 1.8%, respectively.

Furthermore, the Santa Claus rally tends to be a forbearing indicator as to what is to come in the new year. Yale Hirsch famously stated: “If Santa Claus should fail to call, bears may come to Broad and Wall.” Leading into the January Barometer, another of Hirsch’s indicators, the Santa Claus Rally can help discern patterns in the market. Combined with the market’s performance in the first five days of the year, when these indicators unite as positive, the market has ended the year higher about 90% of the time, posting an average gain of almost 18%. This may be important to those holding investments longer term.

There are a number of reasons as to what causes this event, the truth likely being a little of all of them. The optimism around the holiday season, the arrival of year-end bonuses and consequent stock buying, the end of tax-loss harvesting and the resumption of stock purchases by investors are key reasons. There may also be a rebalancing of funds for the end of the year, as well as the fact that many institutional investors take vacation time during that period of the year, allowing excited retail traders to push stocks higher. Either way, the fact that stocks generally rise this time of year is good to know, as we may then use that as an underlying premise for day trading call options.

We day traders don’t much care beyond the day as we make money on an intraday basis. This year, analysts are bracing for the S&P 500 to possibly break 7,000. It had already tickled the threshold on Oct. 29, touching 6,920. SPY has been on its latest upswing since Dec. 17. Unless we bounce off key resistance, there still may be room in the last few days to break that mark.

Funny thing about day trading: while it is good to know where the stock may ultimately go, we can trade both up and down, taking advantage of mid-day moves, or when the stock recoils before making another swing to the north. As one who personally prefers call options, knowing the Santa Claus rally has a strong possibility, I take comfort in staying with my upside trades and it also prevents me from straying to the downside. I simply keep trading to the upside, entering when I see the bounce off support. It’s almost criminal how I make money.

We use all the information we have available to make educated decisions on our trades. The Santa Claus Rally is just one key tool in our wheelhouse that gives us that edge. We have many other tools and would love to share them with you. One question I sometimes hear asked is why I offer this great information, and will it not hurt my chances in my own trades? Quite the contrary is true. The more people use these indicators and strategies we profess, the more likely they all will succeed. If, for example, more people entered a trade to the upside right when our indicators announced themselves, the very act of more volume coming in would help raise the prices. Everyone benefits.

We have a number of programs to help make you into a great trader. Implementing the Santa Claus Rally is just one of them. Could you not benefit from knowing this vital information?

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The Santa Claus Rally… bring it on!

Great trading!