Summary of this article
Samco Securities highlights an 80 per cent historical success rate for India's "Santa Claus Rally" over the past ten years.
Smallcap stocks lead performance with 100 per cent win rates, yielding average returns of 3.55 per cent in this window.
Despite recent volatility near Nifty 26,300, strong SIP inflows exceeding Rs 20,000 crore provide a stable liquidity cushion for year-end.
The month of December is edging to its close, signalling the end of another calendar year. However, the last few days of the year and the first two days of the next calendar year, may hold a surprise for Indian investors, after a year defined by uncertainty, trade tensions and geopolitical conflicts.
According to a report by Jahol Prajapati, Equity Research Analyst at Samco Securities the Indian stock market has historically gained in the seven day period which is defined as the ‘Santa Claus Rally’ in the past ten years. Notably, these gains have been broad based across stocks of various market capitalisations.
What Is the Santa Claus Rally?
The ‘Santa Claus Rally’ is a trend which was first observed by Yale Hirsch, creator of the Stock Trader's Almanac in 1972. Hirsch observed that a consistent rise in stock prices is seen during the last five trading days of December and the first two trading days of January in the US market. However, Samco Securities report posits that the trend has also persisted on D-street between the years 2015 and 2024.
How Does D-Street Fare In The Santa Claus Rally?
Samco Securities’ report studied the movement of the Nifty 100 to observe how largecap stocks traded and the movement of the BSE MidCap and BSE SmallCap indices to observe how midcap and smallcap stocks have traded in the 7-day window of the Santa Claus Rally.
The brokerage firm found in its report that in the last ten years largecap stocks have yielded an average return of 1.78 per cent in the santa claus rally. On the other hand the midcap and smallcap stocks have given average returns of 2.63 per cent and 3.55 per cent respectively in the same period.
The report also found that barring 2015 and 2018, all three indices gained in the seven-day period. In 2015, the Nifty 100 dipped 0.63 per cent while the other two indices gained and in the year 2018, the BSE MidCap slipped 0.14 per cent while the other two indices gained. As a result, the BSE SmallCap index has not dipped during the Santa Claus period in the last ten years, leading to a win rate of 100 per cent. On the other hand, the BSE MidCap and the Nifty 100 have a win rate of 90 per cent each.
In terms of the maximum returns generated by an index in the Santa Claus rally in the last ten years, the BSE SmallCap has rallied as much as 7.23 per cent in 2022. While the Nifty 100 and the BSE MidCap have given relatively lower returns of 4.38 per cent and 4.45 per cent.
What Causes The Santa Claus Rally?
While there’s no single clear reason for the Santa Claus rally, it is likely that it occurs due to a combination of factors. According to a Linkedin post by Apurva Sheth, Head of Market Perspective and Research at Samco Securities, the phenomenon occurs due to the likelihood of positive investor sentiment near the year-end, higher liquidity year-end positioning by large institutions. Another contributing factor is the thinning of trading volumes as institutional investors go on holidays during the period on account of Christmas and New Year celebrations and a similar dip is seen in retail participation. Low volume trades can potentially push prices higher combined with the psychological "risk-on" sentiment linked with the onset of a new year.
What Does A Potential Santa Claus Rally Indicate?
While the report does not explicitly mention the likelihood of the Santa Claus Rally gracing D-street in the current year, the movement of the market in the 7-day period is likely to be a useful reference point for short term market behaviour.
The 7-day period for 2025 is distinct from other years on account of the Nifty 50 recently touching record highs near 26,300 before coming under pressure from a weakening Rupee and persistent foreign fund outflows. On the other hand, several tailwinds such as strong domestic institutional investor buying and monthly mutual fund inflows via SIPs crossing the Rs 20,000 crore mark are likely to provide a liquidity cushion even as D-street is battered by headwinds like uncertainty regarding the signing of a India-US trade deal and sudden spikes in crude oil prices.
Thus for the average Indian investor, the Santa Claus Rally is less of a "guaranteed profit" and more of a high-probability seasonal setup, which should be used for strategically planning the year ahead instead of simply chasing momentum in a likely rally.
