Have you ever heard about the concept of “Santa Claus Rally”? It is a term that is used when the stock market rallies in the last week of December and continues being bullish for the first few days of the New Year.
However, we all know that it is an uphill task to determine a market rally. So, what makes the Santa Claus rally unique? Find out in this article all about the Santa Rally in the Indian share market and whether it is real or not.
What is the Santa Claus Rally?
The Santa Claus Rally concept emerged in the US, where it is seen that stock prices often rise during the last week of December and the first two trading days of January.
This is a period where market sentiment is favorable with less volatility. For example, in 2008 December, this event occurred when the S&P 500 gained more than 7%. However, there are a few times when the market has fallen during the same period.
You could thus say that the Santa Claus rally is a fun little concept that exists to provide an added layer of positive feelings to an already positive festive period. As a result, it is not only a market phenomenon but also a cultural aspect of the holiday season.
Factors for Santa Claus Rally
While there is no guarantee that this rally will occur every year, there are some factors which contribute to this phenomenon:
- The holiday season makes the investor’s mood happy and cheerful, which makes them bullish, leading to increased buying.
- Few investors put their Christmas and New Year’s bonuses into the stock markets, which increases performance before January.
- Trading volume is generally low because large institutional investors often take a vacation between Christmas and New Year’s. This gives the retail investors more influence, who tend to be more optimistic.
- Traders adopt the tax-loss harvesting method, where they sell their stocks at losses during the end of the year. They again, repurchase these stocks in the new year’s beginning, which will naturally drive up the strong stocks due to momentum flows.
- Positive economic indicators and optimism about the upcoming year can boost investor confidence.
Is the Santa Claus Rally Real?
If we look at the historical data, we can say that the Santa Claus Rally is real. However, no investor or analyst can figure out the particular year of the rally.
Yale Hirsch, creator of Stock Trader’s Almanac discovered in 1972 that market returns were exceptionally high in the days following Christmas and the first few days of the New Year, and coined the term “Santa Claus rally”.
He determined that the S&P 500 had averaged 1.5% year-end gains since 1950. Also, 76% of the time S&P has ended positive in the last 45 years, indicating that the rally is real.
Does the Santa Rally Happen in Indian Markets?
The positive sentiments in the US markets have the potential to influence the Indian markets as well. As a result, the positive sentiment of the Santa Claus rally in the US has a huge favorable impact on Indian markets.
The Indian markets could experience a year-end rally influenced by the same factors, such as positive investor sentiment and holiday cheer.
In the past 21 years from 2001-2002, Nifty 50 has provided an average return of 2% during the seven days of the Santa Claus rally.
If we talk about the historical data, during the last 15 days of 2020, Nifty 50 has provided a return of 2.2%. It made 1.7% in the year 2019, and 0.5% in 2018. So, while looking at this data, we can say that the Santa rally is somewhat relevant in India too.
As of writing this blog, Nifty is currently headed towards…
Is There Always a Santa Rally?
No, there is no guarantee that the Santa Claus rally will occur every year. Many factors influence the rally like market conditions, economic data, external factors, etc.
Every year is different, and market dynamics shift. Many analysts use this Santa Claus rally as a base and forecast the upcoming year based on the rally’s performance.
You should be aware of how the market moves during different times of the year and invest accordingly. It’s better to prepare different risk management strategies for different situations and invest as per the market sentiments.
Trading Strategies for the Holiday Season
The holiday season is a great opportunity to get profitable trades. However, you need to be cautious with false breakouts and lower volumes while trading. Here are some trading strategies for the holiday season-
- Position Sizing: As the volatility is high during holidays, it’s better to reduce the size of your positions to avoid huge losses.
- Stay Updated: It is important to stay updated about the latest market news, economic indicators, etc, which can help you to make better decisions.
- Diversification: Diversify your portfolio to spread risk during the holiday season and avoid investing in a single stock or sector.
If you are looking to invest in stocks this holiday season, visit our platform. We have curated a list of stocks to invest in and grow wealth in the long term based on thorough analysis.
Conclusion
We can say that the Santa Claus rally is real; however, it is not guaranteed. So, it’s better not to time the market and invest wisely as per your risk appetite.
No matter if you’re trading the Santa Rally or not, it’s important to understand the market movements to manage your risk.
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