The Santa Rally - Top Stocks for your Christmas Shopping

Tuesday, Nov 28

Does the "Santa Rally" really exist?

Each year the financial markets begin talking up the ‘Santa Rally’ as we approach the end of the year. It’s hard to argue that this phenomenon does not exist, as over the course of history the numbers really do speak for themselves. The more people discuss this and read about these seemingly free returns in the stock market, the more chance there is of it being a reality. It could be argued that in fact what this is doing is creating a self-fulfilling prophecy among investors. By taking a snapshot of the gains seen over the last 10 years in the UK equity market between December 1st to December 31st, it is clear to see there is upside to be had by believing in Santa Claus.





This year we are looking at returns from December 1st to December 31st and look for the ideal entry point on the FTSE100.  The table above shows the average return from the FTSE100 is 1.99%. This appears a no-brainer when displayed in such a way as above, but trading this period in the stock market is far from plain sailing. Looking at the highs and lows during these periods and understanding the potential for large swings in the market is very important. There is no such thing as a free lunch and to have made these returns over the last 10 years, there certainly would have been some periods where investors will have been sweating over whether they are doing the right thing. 

Below is a table of the percentage swings from high to low between November and December over the past 10 years:





The table suggests that from the first trading day of December until the last trading day of December there is a swing from high to low of 6.67% on average over the last 10 years. That is quite some move, and something investors who are positioning themselves for a Santa Rally should be aware of. 2008 is clearly the stand out number with a move of 10.84%. Even if we remove this outlier from the average, the average move in this period is still 6.21%.  Based on these averages, buying early in anticipation of a ‘Santa Rally’ may not be the optimal point of entry. It could be argued that attempting to buy a fall in prices of around 3% after the first day in December could further increase investor’s chances of returns. This also raises the possibility of no entry into the trade at all if a drop fails to materialize.  

Average Drawdown in December from the 1st trading day to the low of the month.





What should we be asking Santa for this year?

We have looked at the seasonal returns of all the stocks in the FTSE 100 over the past 10 years. The table below highlights the best and worst performing stocks over the past 10 years on an average basis between December 1st to December 31st.

The best performers – this is the top 15 returning stocks in December over the past 10 years with a win rate of 70% or above.

Ashtead Group & WPP boast 100% records in December over the past 10 years, while Paddy Power Betfair & ITV have had only 1 negative December since 2007.



Not only have these stocks performed historically well in December, but collectively also very well against the FTSE 100 over the past 12 months. On an equal- weight basis, the stocks have returned 24.3% versus the FTSE100 return of 13.2% since November 23rd, 2016.




The worst performers – this is the bottom 15 returning stocks in December over the past 10 years with a win rate of 50% or below.

Marks & Spencer has consistently performed poorly in December with on 2 up Decembers since 2007 and an average return of -3.23%. HSBC & Anglo American have only produced 3 positive Decembers since 2007.


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Not only have these stocks performed historically poorly in December, but collectively also against the FTSE 100 over the past 12 months. On an equal-weight basis, the stocks have returned 9.6% versus the FTSE100 return of 13.2% since November 23rd, 2016.



Some may be surprised by the lists above, but over the past 10 years, there are some consistent out and underperforming sectors in the market. 

This should not be ignored and should be used by investors to tactically pick areas of the market to produce the best returns in the November to December period. 

 So once armed with these stats we can further drill down into individual stocks and attempt to further enhance gains this festive period. Taking the information above we have compiled a ‘Naughty’ and ‘Nice’ list that investors should be looking at. 

We have devised this list by considering historic returns during this period of the year; the technical setup based on the chart patterns and finally have run the stocks through our internal fundamental ranking system. 

What we are left with is our favourite top 5 buys and sells for the move into the last trading month of 2017. This is the list of stocks that have made it on to the ‘Nice’ list; we expect outperformance going into year-end based on many factors. 

We have limited our search to stocks that are within the sectors mentioned above, then we have looked at the 10-year average return in December, and finally, the stocks score within our fundamental model. 

SCQ = Sequant Capital Quantitative Model Score (This ranks stocks based on a number of fundamental factors) Lower scores are best.



Nice List



The stocks in the above list all rank within the top 33% of our fundamental model. There is a risk by following this strategy of concentrating too much capital in too few sectors, and this is something investors must be mindful of.

The chart below shows the 5 stocks in the ‘Nice List’s’ combined returns since January 1st, 2017:




White – Equal weighted basket of stocks in the ‘Nice’ list since January 1st, 2017

Orange – FTSE100 Return since January 1st, 2017 

Green – The ratio between the 2 above lines – 12.3% out-performance as of 23/11/17

We see a high probability of continued out-performance versus the FTSE 100 in the final month of the year from these stocks. We believe that these stocks could be a great addition to any investors portfolio in the lead up to Christmas.


Naughty List


The stocks in the above list all rank within the bottom 10% of our fundamental model. There is a risk by following this strategy of concentrating too much capital in too few sectors, and this is something investors must be mindful of.
The chart below shows the 5 stocks in the ‘Naughty List’s’ combined returns since January 1st, 2017:


White – Equal weighted basket of stocks in the ‘Nice’ list since January 1st, 2017

Orange – FTSE 100 Return since January 1st, 2017 

Red – The ratio between the 2 above lines – 8.03% under performance as of 23/11/17

We see a high probability of continued under performance versus the FTSE 100 in the final 2 months of the year from these stocks. We believe that these stocks should be removed from long only portfolios or sold short to speculate on falls in price.


What are the options to take advantage of this?  

Exchange Traded Funds (ETFs) 

The simplest way of taking advantage of this seasonal move is to purchase a tracking fund. There are many different Exchange Traded Funds (ETFs) available that track the performance of the index very closely. These will best replicate gains/losses in the underlying index without using leverage and in a very cost-effective way. By trying to capture returns in this way, investors are ignoring the returns that are potentially available on a granular level from the sector and stock specific areas of the market.  Overall this is the option that has the least risk but also offers the least potential return. Physical Shares Investors willing to look at this on a more granular basis can add or remove physical stocks from their portfolio based on the above research.  Some investors do become very much attached to shares and may be sitting on large losses.  Therefore, there will be a reluctance to part company with these stocks. The 10-year period analysed is a small sample in the grand scheme of things, so there is certainly always a chance that a trend could be bucked. The research in this report is designed to show some recent trends. Feel free to use or ignore at your own discretion. 

Contracts for Difference (CFDs) 

Contracts for Difference offer the most flexible way of using the research published in this report. Investors can take short-term long and short positions in Indices and single stocks.  There are plenty of combinations that can be used depending on the individual’s appetite for risk. The overall risk of using Contracts for Difference is, of course, elevated compared to owning physical shares. Some suggested strategies for using this research are as follows. 

Example 1: 

Investors can take a position in the FTSE100 itself. This is typically done on a Pound for point basis. Investors could purchase £2 a point on the FTSE on the first trading day in December and close out the trade on the last trading day in December. This is a simple way of getting exposure to a seasonal rally. We would like to draw attention to the typical swings within the period of December which have averaged out at around 6.67% over the past 10 years. Based on the current value of the FTSE100 (November 23rd, 2017 - 7420) this would equate to 495 points, which at £2 a point is a potential loss of £990. It is important that investors only trade with money they can afford to lose and are aware of the potential risks. 

Example 2: 

Taking a more granular look at the research, investors can pick stocks from our ‘Naughty’ or ‘Nice’ list and Buy/Sell these stocks using Contracts for Difference. This is a riskier option but has the potential for much larger rewards. It is possible to run a market neutral strategy in an attempt to extract gains from the market. This would involve buying and selling at the same time. This could be achieved by buying and selling the individual names simultaneously in equal size. Alternatively, investors could buy or sell the individual companies and hedge this with the benchmark index. This is a less risky strategy as it will insulate investors from the potential large swings during this period, but should still yield decent returns overall. 


Summary

These are just a couple of examples; there are plenty of other ways that gains can be made using other instruments such as Options, or different setups using contracts for difference. Our investment advisors will be very happy to talk to any investor that would be willing to discuss these or any other ideas further.  Good Luck! 



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