4 Ways to Trade the Santa Claus Rally

Tradinformed - Santa Claus Rally

At this time of year investors and traders are looking forward to a bit of festive cheer. December has historically been seen as the best month for stocks. In this article, I am going to analyse whether the Santa Claus Rally still holds true and how to trade it.

If you prefer to watch something rather than read, check out the Video below to see the analysis.

The Santa Claus Rally

Popular wisdom suggests that December is the best month to buy stocks. A number of factors may contribute to this. The obvious explanation is that new money is being invested in the markets. One possible reason why is year-end portfolio balancing by fund managers giving already popular stocks a boost. Also, I like to think that most investors are optimists and want to be well placed ahead of the exppected new year rally. According to Wikipedia Yale Hirsch first identified the Santa Claus rally back in 1972.

Historical Analysis of December

My first step is looking at whether December is a good month to invest. In this analysis, I am using the S&P 500 index as my base data. I am using data from 1990 – 2017.

My analysis of the Santa Claus rally is focused on the month of December. So I started with a straightforward analysis of how December has performed. The results showed that over this time period the S&P has risen 22 times and fallen 5 times. The most recent fall was in 2015.

I carried out the analysis using a Tradinformed Backtest Model. These models are built in Excel and can be used to test many different types of trading strategy. If you want to see the model being used, have a look at the video below. You can see what models are currently available in the Tradinformed Shop.

Results and Capital Graph

Tradinformed Santa Claus Rally

The capital graph shows that the strategy has been pretty consistent over time. Especially considering that this time period includes the bear markets of 2001-02 and 2008-09. One thing I was particularly surprised about was the single biggest percentage winning trade was in December 2008. At the height of the financial crisis, the S&P increased by over 14% between the December 1st, 2008 and January 2nd, 2009.

Metric Result
Gross Winning Trades $63,399
Gross Losing Trades $-14,790
Net Profit $48,609
Profit Factor4.29
Winning Trades22
Losing Trades5
Percentage Winning Trades81%
Average Winning Trade2,882
Average Losing Trade-2,958
Largest Winning Trade $8,696
Largest Losing Trade $-6,508
Max Drawdown6.6%
Average Monthly P/L1.45%

More Trading Strategies

My results suggest that simply buying the month of December has been an effective way to benefit from the Santa Claus Rally. But everyone likes to get a bargain at Christmas time! So I decided to try a few other options. In particular, I was looking to see if it helped to buy when the market was retracing. To test this I looked at 3 different options.

  • Buy after 2 consecutive down days
  • Buy when the MACD is lower than 0
  • Buy when the Close is lower than the Bollinger Band lower line
  • All 3 combined

Results and Capital Graph

Santa Claus Rally Combined Strategy

I have shown the capital graph for the combined strategy. The line is slightly smoother than the buy in December graph.

2 Consecutive Lower ClosesMACD Below 0Close below BBCombined
Gross Winning Trades $57,734 $30,393 $33,419 $60,621
Gross Losing Trades $-10,030 $-2,557 $-3,637 $-9,476
Net Profit $47,704 $27,837 $29,783 $51,145
Profit Factor5.7611.899.196.40
Winning Trades20101220
Losing Trades7227
Percentage Winning Trades74.1%83.3%85.7%74.1%
Average Winning Trade2,8873,0392,7853,031
Average Losing Trade-1,433-1,278-1,818-1,354
Largest Winning Trade $8,633 $8,652 $5,064 $8,627
Largest Losing Trade $-2,593 $-1,384 $-2,315 $-2,593
Max Drawdown6.3%4.4%4.5%6.3%
Average Monthly P/L1.4%2.0%1.8%1.5%

The results shown to me that buying on a retracement has given a small improvement in performance. In particular, I like the combined option. I feel that this gives a small edge with a slightly improved entry point.

Video

You can see the strategies being demonstrated by me in this video.

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