Christmas is rapidly approaching and it’s time to make the most of the seasonal opportunities that exist at this time of year. It’s normal for the market to rally into the end of the year, with the market climbing higher from about the 15th of December through to the end of the calendar year. This pattern is known as the Santa Claus rally.
Seasonal patterns were first produced by Larry Williams in the commodity markets. Larry Williams observed that seasonal price fluctuations occurred in agricultural commodities with prices lower when there was high supply after the harvest, and prices higher when supply was scarce before the next harvest. Seasonal patterns are not confined to the commodity markets and can also be observed in the stock market as supply and demand for shares fluctuate during the year.
From a study of historical data I have found that the Australian market is typically strong through March and April, as it was this year, and then weaker through late May and June, before rallying again in July. The July rally happened this year but was not as strong as the seasonal patterns suggest, but the May and June weakness was certainly visible.
October has a deservedly bad reputation for falling throughout the month and has become famous for the 1987 crash, the 1997 collapse of the Asian economies and the sharp falls during the credit crunch in 2008. The recent market drop may have been a bit of a delayed reaction, occurring in November and not October this year. Towards the end of the year the seasonal patterns suggest a flat market followed by a rally in late December.
Santa Claus Rally
The probability of a rally over the Christmas break is very high. During the last 26 years there have only been two years when the Santa Claus rally did not occur. In 1990 and in 1995 it did not conform to these patterns, but the success rate of this trade is close to 90%. The average gain over a two week period is 3.5% which is a very strong return. If the market climbed at this rate through out the year the market would be up 84% per annum. It is unfortunate that Christmas only rolls around once a year.
Keep in mind that no pattern, even one as strong as this, will guarantee a successful trade, but the odds are certainly in favour of a rally at this time of year. It may or may not work this year, but if you are looking for a present from Santa Claus then you should certainly consider positioning yourself to take advantage of this rally if it does unfold.
For more information on trading opportunities that emerge around specific holidays, you can watch our recent webinars on Holiday Trading. Recordings of these webinars are now available on our websites to view at your leisure:
By Jeff Cartridge