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Guide To Capitalise On The Santa Claus Rally

Summary

  • As the turbulent year inches towards the end, market participants are glued to the much-awaited Santa Claus rally.
  • Investors should retain a hawk-eye view and effectively manage the risks to capitalise on the Christmas rally.
  • Market players can reap the benefits of the Santa rally by closely following the price charts and sticking to their niche.

That time of the year is finally here, when people, in general, are cheerful and get into their shopping shoes to welcome the new year. Interestingly, this shopping spree is not limited to dressing up for the season or buying favourite electronics at great bargains but extends to the stock market as well.

The pandemic caused severe economic turbulence and see-sawing markets during the year. Market participants are now closely eyeing the prospects of upcoming “Santa Claus rally” to close the year on a cheerful note. Historical trends suggests the year end as a shopping week for investors and traders.

More specifically, the Santa Claus rally is a “cyclical phenomenon” in the stock market that usually occurs during the last week of the year and extends itself into the beginning of the new year. Importantly, it may or may not be backed by any fundamental development.

The beauty of this seasonal share market uptick is that it has proven itself several times in the past, which is sufficient for investors and traders to count on it every year. But what makes this rally a reasonably consistent phenomenon?

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Experts believe the usual absence of fund managers, institutional investors and HNI’s during Christmas season leaves the market in the hands of the retail traders with dried up volume. And it is no secret that the low volume market is relatively easier to move. When this low volume market encounters the enthusiasm and shopping spirit of upbeat retail investors, it takes the shape of a share market rally.

Given this background, let us discuss some key tips that can come in handy for investors/traders while capitalising on this Christmas rally:

Keep a Hawk-Eye View

More often than not, the Santa Claus rally is driven by investors’ sentiments amidst the holiday season. The excitement generally fades away in a short span of time. The rally that starts during the holiday season typically lasts for about a week after which all the “big players” get back in the game after the vacation.

In such a scenario, a hawk-eye view can help the market players to navigate the markets with agility. In other words, the smartness in making quick decisions of getting in and out can be more fruitful than sitting with a long-term view during Christmas rally, especially when the market is driven by momentary sentiments.

Always Manage Your Risk

It becomes relatively easier for investors to get carried away with the green numbers shining across the board during a Christmas rally. This induces investors to throw caution out of the window and increase their positions in the hope of making a windfall gain.

While this approach may work a few times, even a single spin of the market can convert this potential windfall profit into severe losses in the blink of an eye. Mostly, the difference between a retail trader and a professional fund manager comes down to how well a market participant manages his risk.

A quote by legendary trader Larry Hite sums it up perfectly “If you don’t bet, you can’t win. If you lose all your chips, you can’t bet.

Follow the Price, not the Advice

During the rally, the Santa has a lot to offer. The Christmas rally is not limited to a specific industry or a group of stocks. Though, there are some stocks that tend to rally more than their peers. Amidst this scenario, it is instrumental for an investor to have an ability to separate the wheat from the chaff, especially when the rally is short-lived.

The technical analysis comes to the rescue at this stage, helping investors identify high-grade securities that can provide a better risk-adjusted return. Investors can screen stocks with strong uptrend and higher momentum while looking at the charts to take a quick move. Nevertheless, a judicious blend of technicals and fundamentals is always better.

Find a Niche and Stick to It

As there are numerous ways to trade in the financial market, a trader/investor needs to be aware of his trading style and adhere to it to avert losses. In other words, market players should avoid being a jack of all trades and master of none.

Not just the Santa Claus rally, sticking to one’s own niche can pay investors in any stock market setting over the long run.

Bottom Line

While these tips can help market participants reap the benefits of the Christmas rally, one need not neglect the associated uncertainty. Therefore, it is important to understand the probabilistic nature of the markets before stepping in to tap the Santa Claus rally.

No matter how sure an event or an outcome is, this rally remains “probable” in nature and never “certain”. However, investors/traders can well capitalise on Christmas or any other potential rally in the stock market if they continue to manage the risk, stick to their niche and ignore the noise.

© Scoop Media

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