Santa Claus rally 2016: will it happen and can you profit?

Stocks tend to rise towards the end of the year, in what's known as a Santa rally. In his latest article for loveMONEY, ISA millionaire Robbie Burns gives his views on how he plans to profit - and what he'll do to minimise any losses.

I've just told my young son Santa doesn't exist, but he says he already knew. I pads have a lot to answer for.

While Santa may not exist, the so called Santa Claus rally - a rise in stock prices over the final week of trading before the New Year - almost definitely does.

Indeed, in the last three years I've made a few quid out of it.

What's amazing about the last three years is all you had to do was place a bet on the FTSE 100 to go up for the last 10 trading days of the year to make money.

What's even more amazing if you look back at the last three years you'd have got quite easily 300-400 points upside each time, assuming you'd held firm.

If history repeats itself this year then it could be in the bag again.

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Patience is key

Consider the Santa rally really being just the last few trading days of December.

I usually quit the trade before New Year's eve – maybe the day before. Sometimes it starts to drift before the year end itself.

A word of warning

 Best way to play it? I use a spread bet. In other words I have the equivalent of a bet on it with a spread bet firm, the equivalent of a bookmaker.

If you'd just put on a tenner a point the last three years you could have made £12,000.

And now the warning: there is no such thing as a free Christmas lunch in the markets!

The FTSE has topped out around 7100 a few times. What if the market is around 7100 as we hit the last 10 days? Could it really zap up another 400 points?

The best hope is a FTSE fall leading up to the last part of December.

And of course this could be the year it doesn't happen! So it has to be considered the same as sticking some money on a horse.

Read: When is investing just gambling?

How to limit your risk

Make sure you can only lose a specific amount, not more than you can afford.

How do you do it? Sign up with one of the many firms. Deposit some cash.

Then you bet "per point". So let's say the FTSE is 6500. You bet £1 per point it will go up.

Every point it goes up you make a quid. Every point down you lose a quid.

Say it goes up 400 points - 6,500 to 6,900 and you close the bet, you make £400 (400 x £1).

But if it went down 400 points you've blown £400. But if you are careful and clever the loss should not be that much.

That's because the good thing about spread betting is you can set a "guaranteed stop loss".

So on placing the bet you click a button saying you want the bet to be closed, say 150 points down max.

So if the FTSE fell to 6350 they would close the bet and you would lose £150 - but that's the maximum you could lose whatever happens!

Or in other words you couldn't lose it all if a massive political event or something happened to rock the markets.

Build your portfolio: visit the loveMONEY investment centre (capital at risk)

Costs to consider

Costs of the bet? Well, profit is tax free. You pay a small amount every day to keep it open but just small change.

So in my example above you're effectively putting up £150 (max loss) for potential decent upside, say a win of £400.

I use two firms for this usually - Spreadex and Spreadco. However, I would suggest you make sure you really know how to put the bet on before doing it – so maybe a read of my chapter on spread betting in my book Naked Trader Edition 4.

Moderation is key

Remember, don't go crazy: just make sure you can really afford to lose the money if the bet hits the buffers.

There are no guarantees. And if you didn't put on a stop loss and the index fell heavily your losses are unlimited.

Why is there often a Santa rally? Lots of conspiracy theories abound, but I can’t say I definitely believe one to be correct.

Some say fund managers push it up to get a better year end return or just low volumes near year end. Well, really, who cares why?

Have a lovely Christmas  - I'm off to Dubai and hope this year the Santa rally pays for the trip again!

Robbie's book, The Naked Trader, is available from Amazon. His latest trades can be found on nakedtrader.co.uk and he also runs seminars on how to trade and invest for beginners. He has made more than £2 million from trading.

The views expressed in this article are the author's own and do not necessarily represent those of loveMONEY. The information included does not constitute regulated financial advice. You should seek out independent, professional financial advice before making an investment decision.

Read more articles from Robbie, also known as The Naked Trader:

A stock market millionaire shares his top tips

Why you need to be unemotional when investing