4 Ways to Take Advantage of the Santa Claus Rally

Most investors will likely have heard of the Santa Claus Rally, the period around the end of the year when stocks tend to rise ahead of a healthier market in January.

This can be a particularly auspicious time for investors — especially those who get an early start.

There are a number of explanations for the Santa Claus Rally, mostly tied to investors taking advantage of tax-loss selling or positioning themselves ahead of the rise in share prices usually seen in January.

In 2020, investors are once again beginning to consider this recurring pattern that takes place during the holiday season. Read on to learn how you can use these circumstances to take advantage of the returns from the Santa Claus Rally this year.

When does the Santa Claus Rally start?

There is some debate as to when exactly the Santa Claus Rally starts. Jack Ablin, chief investment officer for BMO Capital Markets (TSX:BMO,NYSE:BMO), once said that the Santa Claus Rally and the “January effect” are one and the same — it’s just that the share price increases once seen in January are now happening earlier.

“When I started in the business, I remember reading studies about the January Effect,” the Associated Press quotes him as saying. “Once that became common knowledge, the January Effect turned into the December Effect, and now appears to be creeping into November, too.”

Meanwhile, Brooke Thackray, a research analyst at Horizons Investment Management who focuses on seasonal investing, believes the rally starts in a more narrow timeframe. “I do believe that the rally really starts in mid-December,” he has noted. “A lot of people are familiar with the Santa Claus Rally and want to get in before it actually starts.”

Still others doubt that the Santa Claus Effect is a dependable phenomenon. “An analysis of the past century reveals that the stock market in the weeks prior to Christmas is no more likely to rally than at other times of the year,” stated MarketWatch columnist Mark Hulbert late last year. “(I suggest investors) ignore any arguments based on an alleged Santa Claus Rally.”

Hulbert’s doubts rang true in 2019, and some market watchers are convinced that 2020 has already had its Santa Claus Rally in November. That’s what Wall Street vet Ed Yardeni told CNBC’s Trading Nation in early December.

“November was one of the best months ever for the market,” Yardeni said. “It broadened quite dramatically the small cap and mid-cap stocks. It was just a great, great month for the market.”

And yet, the eternal bull that he is, Yardeni is optimistic this trend will continue through the end of the year and in to 2021 given the low interest rate environment. “The market already had its Santa Claus rally,” he said. “But it just keeps going up anyways, and no matter how much you try to look at it fundamentally, I think the fact is there is so much liquidity with interest rates so low driving the market higher.”

Even when signs seem to point to a Santa Claus Rally, it would be beneficial that each investor judge the market and make an individual trade deal call. Asking financial advisors is another good choice.

4 Ways to take advantage of the Santa Claus Rally

If you believe in the Santa Claus Rally, there are a few different approaches you can use to maximize your chances of getting returns this year. Here’s a brief look at four of them.

1. Get in early, stay late

Thackray suggests a standard deviation from waiting for Santa Claus to “come down the chimney,” stating that a better way to take advantage of the Santa Claus Rally is to use the “Santa Claus arrives early and stays late” strategy, and look at the period of time between December 15 and January 6.

He notes that, on average, from 1950 to 2014, the S&P 500 (INDEXSP:.INX) has seen a 2.1 percent gain during that period and has been positive 78 percent of the time. The NASDAQ Composite (INDEXNASDAQ:.IXIC) has similarly recorded average gains of 3.1 percent between those dates from 1971 to 2014 and has been positive 79 percent of the time.

Looking at why that might be, the analyst says that the markets “often get a boost” as money managers settle on their positions in the trading days ahead of the new year. “A lot of seasonal investors will do their trades early and then start taking time off,” he commented. “Institutional investors put trades in early and then retail investors are really moving the market around.”

2. See what Santa has to offer elsewhere

On the other side of the pond, records show a similar trend with the FTSE 100 (INDEXFTSE:UKX). Fidelity International’s research on the FTSE 100 over the last 30 years “shows that out of those 20 years, 26 of those produced a Santa Rally.”

So if you’re wanting to take full advantage of the Santa Claus Rally, another strategy would be to expand your investments into the European market to reap the benefits on both sides of the Atlantic.

3. Keep it in the TSX

For investors not trading in the US and UK, Thackray says that the Canadian stock market also usually does well during the Santa Claus Rally.

David Baskin, president of Baskin Wealth Management, says that an investor’s best bet is to invest in specific stocks or sectors as opposed to the whole index. As he points out in this video, the S&P/TSX has not made great earnings for investors over the last 10 years.

However, Baskin is bullish on Canadian banks as well as some other opportunities. “High yielding utilities, pipelines, and telephone companies providing investors with close on to 5 percent cash on cash and with a history of growing dividends. These are opportunities for people to make money.”

Baskin has pointed out that bank earnings have a big influence on the S&P/TSX, and that if banks do well they may drive up the rest of the markets in the last six weeks of the year.

4. Stick to what you know best

Whether your portfolio usually consists of national or international investments, you can often reduce your risk by sticking to what you know. While the data supporting the Santa Claus Rally can be both convincing and tempting, experts agree that investors should exercise caution and not get swept up in the excitement, as results are never guaranteed. At best, if you decide to gamble, it may be a smart strategy to only make bets on the companies you know the best.

What will you do?

December is already in full swing, but there’s still time for investors to get in and look for bargains ahead of a potential Santa Claus Rally. “For the average investor, this is a good time to be establishing positions,” said Thackray.

Before you invest, it’s good to be aware of the factors that could end up bringing investors coal instead of presents this year. While the threat of further tariffs resulting from the trade war between the US and China has been put on ice for the time being, one never really knows when it could rear its head. Additionally, tax-loss selling could potentially dampen the market and your holiday.

This is an updated version of an article first published by the Investing News Network in 2014.

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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.