Trading the Santa Claus Rally

Barry Norman

Tuesday, December 20, 2016 | 01:00PM EST

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This time of year, the markets as well as the traders are subject to two patterns of mass psychology. There is the Santa Claus Rally which is followed by the January effect. Year after year these events can be seen in price action in the stock market. The Santa Claus rally is a push in the price of stocks that often occurs in the week between Christmas and New Year’s. There are many explanations for the phenomenon, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week. But it happens year after year and an observant trader can make smart trades. This is followed by the January effect.

The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. Another cause is the payment of yearend bonuses in January. Some of this bonus money is used to purchase stocks, driving up prices.
These are not always successful, but using solid risk management a shrewd trader can employ money management skills and still capitalized on these potential moves.

We will also take a few minutes to get a better understanding of the trading in the financial markets and how easy it is to open and close traders on the Trade24 WebTrader platform so that you are ready to make these traders as the holidays draw closer.