How To Trade The Santa Claus Rally

The Santa Claus Rally is a year-end short-term seasonal stock trading opportunity.

While other Wall Street rules of thumb are hard to statistically verify, the Santa Claus rally has historically produced statistically significant returns.

This years Santa Claus Rally period begins on December 24.

One of the most profitable seasonal stock market trades in the past century has been the Santa Claus Rally. How can traders take advantage of the Santa Claus trade? Heres a look at the numbers.

What Is The Santa Claus Trade?

The Santa Claus Rally refers to the tendency for stocks to rally during the last five trading days of a year through the first two trading days of the New Year. Historically, the S&P 500 has averaged a 1.8 percent gain during this period since 1928 and has produced a positive return 78 percent of the time.

Statistical Scrutiny

While many Wall Street idioms and rules of thumb are as shrouded in mysticism as Santa Clause himself, the Santa Claus rally actually holds up to statistical scrutiny.

When the cumulative daily changes in the S&P 500 over the past 64 years are averaged and plotted (along with error bars) against average historical theoretical S&P 500 gains, the S&P 500s average daily cumulative gains throughout the Santa Claus Rally period are significantly greater than zero for all 10 days.

In addition, the returns on all but two of the days are significantly greater than the S&P 500s average historical gains. In other words, the Santa Claus rally is, historically, very real.

How To Play it

The most important part of trading the Santa Claus rally is the timing. Historically, buying an S&P 500 ETF like the SPDR S&P 500 ETF Trust (NYSE:SPY) on December 24 this year should produce a gain of 1.8 percent by Jan 6. However, if the market fails to rally during that period, it tends to continue to underperform for up to six months of the New Year.

Disclosure: the author holds no position in the stocks mentioned.