Here Comes Santa Claus, Are We in for Another Santa Rally?

28 Nov 2023

By Eric Lee, Sales Director, Phillip Nova

Have you heard of this market phenomena called the Santa Claus rally? Have you wondered what it implies and if there’s any truth in it? Well, this is one of the seasonal trends, observed in U.S. stock markets, and it refers to a period of increased stock market performance typically seen during December, sometimes extending into the beginning of the new year. Are we able to quantify and test this phenomenon to derive a calculated definition to it?

To test this out, I had developed a set of simple rules and apply the rules on historical data of E-mini S&P futures since 1997 and until 2022. The rules are:

Buy 1 lot of E-mini S&P on the 2^nd last Monday of November
Sell 1 lot of E-mini S&P on the 1^st Friday of January in the new year
Sell (cut-loss) if E-mini S&P falls 70 points below the Entry Price, based on point 1.

E-mini S&P futures contracts are designed to track the performance of the S&P 500 Index, which comprises 500 of the largest publicly traded companies in the United States. The S&P 500 Index is a widely followed index and is regarded as a barometer of the overall health and performance of the U.S. stock market.

Over the last 26 years, this test had resulted in a gross profit of $48,000 and achieved a winning percentage of close to 70%. So far, the largest profitable trade it achieved was in December 2020 with a profit of close to $14,000. The stop-loss rule of 70 points capped its largest loss to $3,500 per year. The largest drawdown observed was 2 years in a roll. It happened twice, once in 2014 and 2015, once in 2021 and 2022 (referring to the statistics I compiled as seen below).

The impact of the Santa Claus rally on the E-mini S&P futures varies from year to year. While it is not a guaranteed phenomenon and does not occur uniformly every year, historical data suggests that the market tends to exhibit positive movements during this period more often than not.

The 3 simple rules were set out for the purpose of running this test and traders are advised not to take these rules literally for trading. Other factors such as geo-political events, market sentiments and economic activities will influence how the index will move.

Phillip Nova offers products and services which allow traders to trade in futures such as E-mini S&P and many others. My clients have also benefitted from interesting research such as this, which I produce periodically to enable customers get a better understanding of the financial markets.

In conclusion, while the Santa Claus rally is a widely observed as seasonal trend, its impact on the E-Mini S&P is not absolute. Traders should exercise prudence, conduct thorough analysis, and utilise a suite of analytical tools to navigate the markets successfully, regardless of seasonal trends.

Value-Added Service from Eric Lee

My clients benefited from my services including investment advisories in unit trust and stocks, investment insights based on my personal knowledge and experiences while navigating the markets for the past 20 years.

Periodically, I will be send out market analysis to my clients, as well as alerting them of support and resistance levels for the technical indicators which I am utilising on a chart. Click on the button at the bottom if you would like to arrange for a One-to-One Coaching session to learn more about trading futures, forex, stocks and more, and how you can benefit from the services I provide.

Eric Lee is a Sales Director with Phillip Nova. With expertise in Futures, Forex, Stocks, and Unit Trust, Eric makes an all-rounded advisor. Make informed trading decisions without spending time combing through endless information as Eric readily provides clients with trade alerts and insights via WhatsApp. Over his years of experience, Eric developed systematic strategies in trading and investing. Book a complimentary coaching session below to leverage on his expertise as he imparts his knowledge to enhance your trading journey.

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

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