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.
Prajapati told Outlook Money that the Santa Claus Rally is primarily a sentiment-driven, seasonal pattern and the track record of the rally repeating itself should be seen as an an additional tailwind rather than a guarantee.
"While rupee weakness, FII selloffs, and trade uncertainties are important macro considerations, it's essential to understand that markets respond to multiple factors simultaneously. The Santa Claus Rally is primarily a sentiment-driven, seasonal pattern supported by lighter trading volumes and year-end portfolio positioning. Our historical analysis shows a strong track record, but this should be viewed as an additional tailwind rather than a guarantee," Prajapati said.
Macro headwinds like FII outflows typically influence longer-term trends, whereas seasonal patterns create shorter-term opportunities. The rally's likelihood increases given the historical precedent, but investors should monitor both technical setups and evolving macro conditions as we approach the period.
Prajapati also spoke about the strong performance of smallcaps and said that their past performance should not be treated as a guaranteed outcome.
"The 100 per cent win rate for small caps over the past decade is certainly compelling, but past performance should not be treated as a guaranteed outcome. While this data provides strong historical support, portfolio decisions must factor in current valuations, individual risk tolerance, and overall market conditions. Rather than aggressively increasing exposure based solely on seasonal trends, investors should consider this pattern as a supporting factor in their decision-making process," Prajapati said.
Prajapati urged investors to use the opportunity to add stocks selectively and monitor position sizes carefully.
"Use this period as an opportunity to add selectively the quality mid and small-cap stocks with solid fundamentals. Monitor position sizes carefully and maintain appropriate stop-losses. Avoid over-leveraging or taking outsized risks assuming guaranteed returns and don't chase stocks purely based on historical seasonality without fundamental backing," Prajapati said.
