Robbie Burns’ Trading Diary – Time for the Santa Rally?

As featured in this month’s magazine.

It can’t be can it? Is it really nearly Christmas again?

Frankly I feel Scrooge-like about it. Bah humbug! I hate the cold, the dark and all that. And those annoying TV ads. And…  look you don’t want me spoiling it for you; I’m off to Dubai for some lazing around in the sun. Now that’s more like it.

But Christmas is handy, as marketwise there is usually money to be made. Yes it is the “Santa Rally”. Loved by all of us traders (and journalists who can fill space by repeating what they wrote about the Santa Rally last year – done in a minute, off to the pub). So I am off to the pub in about 60 seconds.

Yes, for some unknown reason it’s well known that December is one of the best months for share performance.

Most years, while it’s cold outside, December is hot! The statistics support my argument: historically the strongest week of the year for the market is the 51st week. And the second strongest? The 52nd!

The probability of positive returns in December is a high 69%. The market’s only had one significant fall in December since 1981. Both mid- and large-cap stocks perform equally well. Since 1984, when the FTSE was created, the index has increased on average by 2.3% in December. The market has only fallen five times in all those years.

Why are the markets so good at the most wonderful time of the year? I suspect it is down to something as simple as human psychology.

We all feel good with the approach of Christmas, then there are New Year’s hopes and dreams. And probably funds want to end the year on a good note. But by the end of January we tend to be left with a bit of a hangover and that’s why February isn’t so good. There is also some anecdotal evidence that certain persons push up markets to make their performances look better. That’s what someone down the pub told me anyhow.

Also, as markets often fall somewhat in October and November, investors begin to come in now and buy what they perceive as bargains.

The period between Christmas and New Year often sees stocks squeezing higher on thin volumes.  Many stocks race higher during the holidays; there is frequently no one selling and institutions are shut. This often has a good effect on stocks at the smaller end of the market.

Of course, I am making it all sound too easy… it’s never going to work out every year. But the use of tight stop losses should ensure that when you meet a year without a Santa bump, your losses will be minimal.

The best way of playing it is a FTSE or Dow long spreadbet – just a rolling one, as we’re only looking short-term.

A trailing stop loss of say 100 points (to ensure no sudden spike out) might work out.

First (and I do this most years): I buy the FTSE 100 index in early/mid-December and I sell in early January to take advantage of the fact that the FTSE usually rises in this period.

I usually just make a simple ‘long’ FTSE 100 spread bet, with the stop loss in place just in case it’s the occasional year when the festive uplift doesn’t happen. Might even be worth having a guaranteed stop in case something bad happens when you least expect it. Remember the FTSE trades 24 hours Mon-Fri up to 9pm(ish) Fri and then from 11pm Sundays. IG even does a Sunday index spread too.

There are also ETFs like LUK2 which go up if the FTSE goes up and you can use those in an ISA tax free, though unlike spreadbets it is only open market hours.

Let’s have a look at the last couple of years. In 2013 when I bought just before Christmas at 6,445 and the market had a lovely festive rally and in January went to near 6,800 for a tremendous profit!

Last year (2014) the best time to buy was around mid December and then bank gains near the end of the year. So say you’d bought the FTSE around December 14th and sold just after the Xmas bash around the 28th-30th you could have banked more than 400 points as the FTSE rose from under 6,200 to over 6,800.

But do remember: the market can never be totally predicted so beware, maybe this is the year it won’t happen.

I find December is also a good time to have a look at some of the smaller stocks in the market and sometimes have a bit of a gamble on a few stocking-filler shares. But only a little gamble, mind. Let’s not be idiots.

Looking at specific days, would you believe it the short half day on Christmas Eve is the strongest market day of the year, with the 23rd being the strongest day.

But watch out, the first week in January is the weakest market week. (You can imagine this is when people look at their credit card spending in December and it reality hits.) At the beginning of this year the market indeed fell the first few days, though it did OK after that.

On the downside, one thing to watch out for is companies sneaking out bad news between Christmas and New Year. It’s the same as political parties burying bad news on a day when a big story emerges elsewhere.

With so many people away, the companies hope the stinker will go unnoticed. So it’s worth keeping an eye on news that’s related to your stocks.

I get out quick if any kind of bad company news is released on one of my shares at this time.

So, to sum up… long the FTSE usually works from mid-December but by the time we hit January a switch to a short might pay.

If you’re going to play the Christmas game, good luck, but remember markets sometimes don’t do what is expected, so beware! Anyway if you lose I’ll be hard to find… look for a very luxurious hotel somewhere in Dubai!