The Santa Claus Rally in DAX and Euro Stoxx 50
Our backtests show significantly better performance during the Christmas season and the end of the year. The Santa Claus rally is no myth in Europe, either! The end of year rally in DAX40 is alive and well.
It’s a pretty well-known “fact” that stock markets tend to perform well before and during holidays, at least in the US. We wrote about the US Santa Claus Rally earlier.
In this article, we look at the end of the year rally in stocks, sometimes referred to as the Santa Claus Rally or end of the year effect, on the German DAX and Euro Stoxx 50 futures contracts.
Holiday effects in the stock market:
We have covered many seasonalities in previous articles. We recommend the following articles about seasonality among our articles about trading strategies :
- Why use seasonalities and seasonality in trading
- Trading the holiday effect in stock markets
- The Thanksgiving and Black Friday effect in the stock market
- Last trading day of the month trading strategy
- The options expiration week effect
- The turn of the month trading strategy
- First trading day of the month trading strategy
We backtest the Santa Claus rally in Dax and the Euro Stoxx 50
We backtest the Santa Claus Rally like this:
- We go long at the close of Friday prior to futures expiration (the third Friday of the month).
- We exit at the close of the first trading day of the new year.
The backtest is from 2001 and onwards and performed of the respective future contracts.
However, we test with 100 a margin requirement and no leverage. The results are compounded by investing 100 000 in the first year and 100% of the equity for the next trade.
The Santa Claus rally in DAX:
This is the equity curve in DAX:
The average gain per trade is 1.81%, the win ratio is 71%, and the profit factor is 4.4.
The Santa Claus rally in Euro Stoxx 50:
This is the equity curve in Euro Stoxx 50:
The average gain per trade is 3.65%, the win ratio is 71%, and the profit factor is 5.1.
Just like DAX, we can see that the returns in the last 6 years were way below the average of the prior 15 years.
The positions are held on average for about 12-13 days. If we enter the position one week later, on the futures expiration day, the holding period obviously drops 5 days to 7-8, but the average gain per trade also drops.
Conclusion:
The performance over the two weeks is significantly better than any random period during the year. The average gain any random week for DAX 40 is 0.12% and 0.18 for Euro Stoxx 50.
Thus, we can safely conclude there has been a Santa Claus Rally in DAX 40 and Euro Stoxx 50. That is, of course, no guarantee it will continue in the future!
