The End Of The Year Rally In Stocks (S&P 500 Santa Claus Rally/Effect)

Last Updated on April 19, 2022 by Quantified Trading

The Santa Claus Rally

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.

What happens to the stock market during Christmas? Do stocks rally at the end of the year? Is there a turn of the year effect in stocks?

In this article, we look at the end of the year rally in stocks, sometimes referred to as the Santa Claus Rally or turn of the year effect.

Back in December 2013, Jay Kaeppel wrote about this effect on his website jayonthemarkets.

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 as the Santa Claus effect, the turn of the year effect, or the 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 (100 000 invested in 1960 and compounded/reinvested):

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 max 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 turn of the year effect is a great way to end the year and start the new 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.

Let’s test another twist to the hypothesis and increase the holding period:

  • We enter at the close on the Friday prior to the options expiration week and sell at the close of the third trading day of the new year.

This returns the following equity curve:

The strategy has produced 1.79% per trade, the win ratio is 75%, the average winner is 2.98%, the average loser is -1.9%, the profit factor is 4.7, and max drawdown is 11.7%.

Why does the year-end rally happen? Why is there a turn of the year effect?

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. When there is a vacuum of news there is less to worry about and prices tend to go yp.

Moreover, 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.

Amibroker code for the end of year rally, turn of the year effect, and Santa Claus rally:

If you’d like the Amibroker code for the strategy, please order the logic and code for all our 60+ free trading strategies on this website:

A somewhat similar seasonality exists on other exchanges:

The end-of-year effect and Santa Claus Rally in the S&P 500 is no myth!


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