Was the Santa Rally going to happen or not this Christmas? Would there be any festive cheer for those who trade this strategy in 2015? For a period of time it looked like it wouldn’t, especially when Janet Yellen announced the US interest rate rise from 0.25% to 0.5% earlier in December. It looked like that one move had torpedoed any chance of it happening. Then mid-month the Santa Rally trade 2015 finally arrived!
What is the Santa Rally trade?
This can be a great trade and with a knowledge of technical analysis, you can make this a very profitable annual strategy to add to your portfolio. Again it proved a fruitful trade in 2015 – if you got the timing right.
Traditionally, and most reliably, this trade has been very successful on the FTSE 100 and US Indices like the S&P 500, but can also work around the globe on other stock indices like the DAX, Kospi and Nikkei 225.
For the last 20 years or so, it has worked non-stop. So, what exactly is the Santa Rally trade? It is an annual one-off trade. December/Christmas is pretty much always a bullish month for many reasons: the festive period for retailers, traders locking in bonuses, funds/pension institutions re-balancing, company year ends etc. What is a ‘known’ is that at some point in December certain stock indices like those mentioned will go up.
Many market theorists will tell you to enter and exit this trade on specific dates – the perceived wisdom is to buy at the beginning of December and sell at the end of the month. However, I think the trade is actually a bit more difficult to execute than that, and following this approach blindly will lead to more losers than winners.
If you had followed this advice in both December 2014 and 2015, you’d have more than likely lost. In 2015, you would have mostly lost using that approach, because up until the 14th the FTSE 100 was very bearish, in a steep down trend and I’d say very difficult to trade. (It was bearish to the 16th in 2014)
On the other hand, had you worked on those first principles of the market ‘will go up’, but married it up to technical analysis for timing of the entry and exit of the trade, you’d have ended up a winner in 2014 and 2015.
Santa Rally 2014
In 2014 I made 216 points on the trade (Bought at 6306 and Sold at 6522)using a 60 minute chart technical analysis timing strategy, that involved Heikin Ashi candles and several momentum indicators e.g. Stochastics.
The daily chart below for the 2014 UK FTSE 100 Index puts the short term nature of the rally into perspective. Optimally, the trade only lasted for 7 trading days, but potentially offered an 8.26% gain (+507 points) from the bottom on the 16th. My strategy has very strict rules governing entry and exit on the 60 minute chart. It didn’t let me pick up the full 507 points but still allowed me to lock in over a 200 points gain:
Santa Rally 2015
As 2015 closed, another successful Santa Rally trade also came to an end. On the FTSE100 there was a possible 440 points (+7.5% gain) on offer in the space of a couple of weeks. A pretty decent short term return in anyone’s books! The 240 minute chart of December 2015 shows how this year’s Santa Rally played out:
Test the theory – take a look at a few charts and see how you’d have traded the Santa Rally in previous years. This trade is always on my Christmas list. Maybe it has become a bit of a self-fulfilling prophecy trade, aided by all those High Frequency Traders out there, but it is definitely a trade worth putting on your radar for December 2016. Just make sure you get the timing right.