We’re heading into one of the more popular seasonal trends known as the Santa Claus Rally… It’s my favorite time of the year and always has been. As a kid, nothing is better than waking up Christmas morning with surprise gifts that you’ve been waiting months for. And now I get to pass that feeling on to my own kids.But, as with any holiday, it’s a whole season of giving and the stock market doesn’t disappoint.We already got a Black Friday sale in stocks thanks to a sharp sell-off. And now, from the day after Christmas, to the first two days of January, the stock market tends to climb higher.This year, I’m banking on another positive performance out of the market. Here’s how you can profit…
Why We Expect the Santa Claus Rally
Looking back over the last 20 years, this time period, the week after Christmas to the first two days of the new year, have been up the majority of the time, with a positive performance on average.I tested it based on buying on December 26, or the next open market day, and selling January 5 (the longest the first two days of the year could be) over the last 10 years.Super simple trade. And here’s the results…60% of the time the S&P 500 has gone up during the Santa Claus period. It’s averaged a 0.59% gain as well. Not a huge amount by any means, but the consistency and positive performance show us this is a key trend to watch.However, over the last two years, Santa didn’t show up.It was down 0.16% in 2019-2020 and down 0.23% from 2020-2021.But I’m not counting on it being down a third year in a row. So let’s place a trade that can profit from a traditional Santa Claus Rally…
The Christmas Trade
I’d play it with a short-term call option.That’s going to give us the biggest bang for our buck from an expected short-term move. And since we tested it on the S&P 500, we’ll simply trade that.It’s the easiest way to take advantage of any Santa rally that plays out this year.Using the SPDR S&P 500 ETF (SPY) will help us benefit. You can buy the January 7 expiration, expiring next Friday.Just use an at-the-money strike price, or the one closest to where the SPY is currently trading.Then we just sit back and wait for the Santa Claus Rally to show up and push the stock market higher one more time.Regards,
Chart of the Day: This Fund Needs Some Holiday Cheer
By Mike Merson, Managing Editor, True Options Masters
(Click here to view larger image.)
If anything needs a visit from the Santa Claus rally this year, it’s the ARK Innovation ETF (ARKK).This ETF, actively managed by Cathie Wood’s Ark Invest, holds some of what the fund calls the biggest innovators in the stock market. Tesla holds nearly 8% of the fund’s weight, along with stocks like Roku, Teledoc, Zoom, and Coinbase — which each make up about 5% or more.What you might’ve noticed about these selections, and the chart of ARKK itself, is that they’re all down over the past 6 months. The fund stubbornly holds some of the worst-performing stocks of the latter half of this year. Over all it’s down 21% from the start of the year and nearly 40% from its all-time high in February. Ouch.Right now, this ETF needs a little love from the Santa Claus rally. And it might just get it.If ARKK can manage to cross over the closest downtrending resistance, with a little help from a bullish MACD cross, it could turn the tide and possibly enter a new uptrend. It’s certainly possible that could happen in the next couple weeks, too.This is one to watch. If this high-risk fund can mount a recovery, that could be a definitive sign that greed has returned to the markets.Regards,
