Last Updated on August 26, 2021 by Oddmund Groette
What happens to the stock market during Christmas? Do stocks rally at the end of the year?
In this article, we look at the end of the year rally in stocks, sometimes referred to as the Santa Claus Rally/Effect. Our backtest reveals that this is no myth: the stock market shows significantly better performance in the last days of the year and the first days of the new year.
Back in December 2013, Jay Kaeppel wrote about this effect:
The end of year strategy/rally/effect:
The strategy is pretty simple:
The last four days of December and the first three days of January are often referred to at the Santa Claus and end of year effect. Let’s test if the hypothesis is true.
How has the year-end rally performed? Below is the equity chart of the S&P 500 from 1960 until January 2020:
The strategy has produced 1.12% per trade, the win ratio is 68%, the average winner is 2.47%, the average loser is -1.88%, the profit factor is 2.66, and the biggest drawdown is 9.2%.
In other words, it clearly exists a Santa Claus rally! This really is the most wonderful time of the year.
The backtest shows a CAGR of 1.07% while only being invested 2.7% of the time.
The performance was recently weak with three losing years in a row: 2013/14, 2014/15, and 2015/16.
Why does the year end rally happen? One reason could be an injection of funds into the market. Mutual funds need to rebalance to account for accounting and tax issues, and at the same time, there is very little macro news during this time of year. Most people are on holiday and enjoying their time and see no clouds on the horizon. Thus, there are few reasons to sell stocks unless you get a higher price.
If you’d like the Amibroker code for the strategy, please order our 29 page PDF document that contains the logic and code for all our 60+ free strategies on this website:
A somewhat similar seasonality exists on the exchange of Oslo:
If you find this article interesting, we have many more strategies on this page:
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.