It’s one of the most bullish periods of the year…

Yes, it’s Santa Claus rally time!

Unfortunately, many investors are often confused about how the Santa Claus rally works, and when it actually takes place.

Today, I’ll dispel some misunderstandings swirling around Kris Kringle’s yearly visit to Wall Street.

Then, I’ll show you where we should focus our energy over these crucial days as the market offers some holiday magic for bullish investors.

The Lowdown on Santa

December and January host several seasonal trends (the January Effect, the First Five Days, the January Barometer), with a few providing the most potent signals of the year. This can add to the confusion.

Plus, unlike Christmas, the Santa Claus rally doesn’t fall on a fixed yearly date. Instead, it encompasses the last five trading days in December through the first two trading days of the new year.

This year, the rally began on Christmas Eve and will run through next Friday’s close (Jan. 3).

Before you write off this year-end trend as voodoo or superstition, numerous end-of-year factors join to propel stocks to fresh highs. As Enrique mentioned previously, compensation packages incentivize money managers based on year-end performance. Plus, holiday bonuses and portfolio restructuring flood the market with cash.

The Santa Claus rally has averaged a 1.6% gain since 1928, according to Oppenheimer, with 1-month, 3-month, and 6-month forward returns averaging 1.7%, 2.6%, and 5.3%, respectively. Not bad!

This reminds me of the market maxim: strength begets strength.

Not only is the 7-day period a bullish tailwind, but stocks also tend to do well for the first half of the year when Santa comes to call. That’s valuable information.

But the greatest insights arise when markets veer from their seasonal norms.

No Santa, No Worries?

I’m sure you’ve heard the stock market adage, “If Santa Claus should fail to call, bears will come to Broad and Wall.”

History tells us that when Santa bypasses Lower Manhattan, the average returns aren’t terrible six months out (0.4%).

Of course, a few bear markets have followed in Santa’s absence (most recently, the 2000 dotcom crash and the 2008 financial crisis). But the data supports the buy-and-hold strategy’s foundational principle: stocks trend higher over the long haul.

So, what’s the game plan for this year’s Santa rally?

First, I think it’s an excellent time to hunt for quick, explosive gains. Remember, this window is small – a little more than a week.

We’ll have to adjust our tactics depending on whether markets rally into early January. In the meantime, stick with what’s working – speculative growth.

But be prepared to switch gears in 2025…

Seasonality is sometimes a tricky subject, and there are exceptions to every rule when dealing with seasonal trends.

Seasonal patterns trend much like price, and markets have adhered to their seasonal and cyclical patterns with only the slightest deviation for the better part of two years.

Also, we’re in the midst of a rising rate regime. I’ve been discussing it for months. The market's reactions to Powell’s presser last week reiterated the sticky nature of the current inflation-riddled environment and the potential trouble ahead.

The “Last Sector Standing” Tops Our 2025 List

If we do end up switching gears in 2025, energy might offer your best shot at gains…

Following the previous melt-up, the Energy Sector ETF (XLE) gained 30.61% during Q1 2021, while the S&P 500 (SPY) rose a mere 7.82%.

The gap between energy and the rest of the market widened as rate hikes loomed in early 2022.

XLE posted a 34.87% return for the first three months as most market areas began to roll over. SPY fell more than 5% over the same time period as top growth sectors – technology and communications – dropped double digits.

It makes sense. Energy is the last sector standing when markets enter a significant downturn. And if the broader market comes under pressure in 2025, energy names will continue to rally (even if Powell threatens to hike rates).

On the flip side, the technology sector leads at the start of the business cycle. It was tech’s time to shine as stocks bottomed in October 2022, as many high-flying tech names cemented their bear market lows a few months later in early January.

Fast forward to today, and we can all agree we’re a couple of years into a bull market.

I highly doubt large-cap tech will outperform like it did off the bear market lows. In fact, the Nasdaq 100 is already showing signs of relative weakness, as it has been trailing the S&P 500 and Papa Dow for months. (Another reason to bet on energy next year.)

The S&P 500 is bouncing above 6,000. The Nasdaq is trading 1,000 points from record highs. Plus, the small-cap Russell 2000 is stabilizing after registering a new all-time high last month.

Seasonal tailwinds could supercharge the next six trading days.

Looking further down the line, the current bull market, the rising rate regime, and the recent Q1 strength deem energy the best bet through March.

Stay tuned!