Trader Q&A: Santa Claus Rallies and Window Dressing

How stock and options traders can capitalize on seasonality

Dec 22, 2017 at 3:19 PM
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2017 is winding down and the holidays are right around the corner. In the investing world, with the end of the calendar year also comes several seasonal trends that traders can take advantage of. Two examples are the Santa Claus Rally and window dressing. So, how can traders capitalize on these trends in the upcoming weeks? To answer that question and more, I spoke with Schaeffer's Senior Quantitative Analyst Rocky White.

What is a Santa Claus Rally?

RW: A Santa Claus Rally is a seasonality trend when stock prices rise toward the end of the year and during the holiday season. In fact, from Dec. 15 through the end of the year, the S&P 500 Index (SPX) has averaged a gain of 1.59% over the past 50 years, and was higher 80% of the time.

Tax considerations, optimistic sentiment around the holidays, and extra cash from bonuses are all reasons for the surge in stock buying. The Santa Claus Rally is also a reaction to anticipation of the "January effect," which is the seasonal price increases of stocks during the first month of the year.

What is window dressing?

RW: Window dressing is another seasonality trend, when portfolio managers purchase the hottest stocks -- or sell the weakest stocks -- just before the reporting date, often toward the end of the quarter. It's a strategy utilized by fund managers to outwardly improve the appearance of portfolios prior to a quarterly fund report. Thus, the best stocks tend to do even better during the last week of a quarter.

How can traders capitalize on seasonality? 

If traders are wavering on when to buy or sell stocks, seasonality could play a role in deciding timing. For example, an investor wanting to sell stocks may choose to hold through the end of the year, given the tendency for gains in the final two weeks of December.

Are certain sectors or stocks more susceptible to a Santa Claus Rally and/or window dressing this year?

We recently outlined 25 stocks that tend to outperform during Christmas week, and soon we'll publish data on the best stocks for New Year's week. As far as window dressing goes, according to the theory, you want to look for stocks that have performed very well for the last several months. Fund managers may buy up these stocks so they show up on their holdings disclosures.

However, according to a previous study which I wrote about in an Indicator of the Week article, there's less evidence for window dressing in the fourth quarter as compared to other quarters. One theory is that buying/selling for tax purposes overrides window dressing buying/selling.          

What sectors or trends will you be watching in 2018?

I mainly just crunch numbers and study data. I don’t really have stalking lists or watch lists, so I don't have unique opinions on where things are going. However, things I'm curious to see going forward include bitcoin (of course), and whether retail stores continue to collapse or if they rebound some. Also, I’m curious about tech and video game stocks, if they continue going higher.



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