Playing The Christmas Trading Game

Playing The Christmas Trading Game

The one topic that always lands in my inbox in December is:

“How do you play the Christmas rally?” The Santa Rally always becomes a hot topic in December.

It’s well known that December is one of the best months for share performance.

Why’s it so good?

Because most years, while it’s cold outside, December and January markets are 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.

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.

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. While I might well be tucking into mince pies, I’m usually also at my trading desk watching for opportunities to make money.

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.

Best way of playing it is a FTSE or Dow long spreadbet - just a rolling 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. This worked nicely in 2013 when I bought just before Christmas at 6445 and the market had a lovely festive rally and in January went to near 6800 for a tremendous profit!

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, tiddler 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.

Which suggests buying stuff on the 22nd might work!

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 reality hits.)

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 often don’t do what is expected, so beware!