The Emerging Markets Santa Claus Rally – Unveiling End-of-Year Market Momentum

The Emerging Markets Santa Claus Rally – Unveiling End-of-Year Market Momentum

ByOddmund Groette Seasonal trading strategies

The Santa Claus Rally In Emerging Markets

One of the seasonal strongest periods is approaching: the Christmas holiday. The Santa Claus Rally or the end of the year effect has proven to show strong gains in the US markets and most of the Western stock exchanges. In general, the holiday effect is well documented and we covered the US Santa Claus Rally in a separate article. We also documented a Santa Claus Rally in NIFTY (India).

Santa Claus Rally in Emerging Markets

Is there a Santa Claus Rally in Emerging Markets?

To find out we did a backtest:

We backtest the Santa Claus Rally in Emerging Markets

We did the following:

To get a longer time frame in our backtest we used Fidelity’s Emerging Markets Fund as a proxy. The fund has daily quotes and can be downloaded from Yahoo!finance. The ticker code is FEMKX and has data back to 1990.

The backtest was done like this:

  1. We go long at the close of the second Friday in December.
  2. We exit at the close of the first trading day of the new year.

We invested 100 000 the first year and compounded by reinvesting 100% of the equity the following years. The backtest returned this equity curve:

The average gain per trade is 3.05%, the win ratio is 77%, the profit factor is 8, and the max drawdown is 7%.

We had 31 observations and it seems pretty obvious that we have a strong seasonal period in the form of the Santa Claus Rally in Emerging Markets. We can also call this the end of year effect.

FAQ:

Is the Santa Claus Rally only observed in the US and Western stock exchanges?

No, the Santa Claus Rally has been documented in the US markets, most Western stock exchanges, and also in emerging markets, indicating a global occurrence of this seasonal effect.

How was the Santa Claus Rally in Emerging Markets backtested?

The backtest for the Santa Claus Rally in Emerging Markets used Fidelity’s Emerging Markets Fund as a proxy. Daily quotes for the fund, with the ticker code FEMKX and data dating back to 1990, were downloaded from Yahoo! Finance. The backtest involved going long at the close of the second Friday in December and exiting at the close of the first trading day of the new year.

What is the significance of using Fidelity’s Emerging Markets Fund as a proxy in the backtest?

Fidelity’s Emerging Markets Fund serves as a proxy to represent the performance of emerging markets. The fund provides daily quotes, enabling a longer time frame for the backtest.

I’ve got an Msc from Heriot-Watt University, Edinburgh (1996), in addition a to a business administration degree the Norwegian School of Management (BI – 1994). Did my mandatory military service in between.

After university, I worked two years as an auditor (1996-1998).

I co-founded Aksjeforum.com in 1998/99 - one of the first websites about trading and investing in Norway. It was later acquired by Digi.no in 2001.

I have written 4 books about trading (in Norwegian). One of them has sold 30,000 copies, a record for a financial book in Norway.

From 2001 until 2018 full-time independent prop trader (Series 7 in 2001) and investor.

2018-today: Investor, writer, analyst.

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