The Santa Claus Rally and Summer Doldrums Aren't the Only Market Seasonality Trends

The Santa Claus rally is one of the most ubiquitous seasonal trends in markets, where investors often associate the seasonal cheer to underlying performance. What really leads to these expectations and what other ‘seasonal trends’ are there? 

Talking Points:

• Seasonality refers to recurring patterns in liquidity, volatility, and market behavior tied to specific points in time
• Seasonality isn’t just a consideration through a typical year - there are volume and open interest norms intraday (sessions), intra-week (pre- and post-week) and intra-month (expiries)
• Most common in this category are changes through a calendar year tracking societal norms like typical vacation periods or accounting time frames such as fund rebalancing
   

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What is Seasonality

Market behavior may not be as random as many suspect. Prices move in response to fundamental news, central bank policies, shifts in sentiment, and ongoing global macro forces. But there is another influence - often less appreciated by market participants and analysts - that shapes the backdrop for all other analysis: seasonality.

Seasonality refers to recurring patterns in liquidity, volatility, and market behavior tied to specific points in time. These patterns can play out within a single trading day, across days of the week, around monthly or quarterly cycles, or as broader annual tendencies recognized by generations of traders.

Drivers of these tendencies includes structural and external forces such as:

• Liquidity cycles
• Institutional behavior and accounting periods
• Derivative flows such as ETF rebalancing and derivatives expirations
• Behavioral biases and societal events (such as school schedules and holidays)
• Other macro themes that align with typical timing conventions

 

Annual Seasonality: From the January Effect to Santa Claus

Some of the best-known seasonal trends unfold over the full calendar year.

The January Effect

Historically, U.S. equities - particularly small caps - have shown strength early in the year as investors buy back stocks they sold at year-end for tax purposes. While the magnitude of this effect has faded over time, it remains broadly engrained in the collective outlook and seems to average out in benchmark market measures’ performance.

Sell in May & Go Away / The Summer Doldrums

As the Spring gives way to Summer (for the Northern Hemisphere) participation tends to deflate with volume and open interest fading into the holiday period. In some cases, the reduced activity can leave markets little moved or there can arise a tepid bullish bias to remain ‘exposed’ to a yield-oriented setting. Leading into the approach of quiet has led to the ‘Sell in May and Go Away’ setting and the subsequent months before the US Labor Day holiday (as a loose turning point) can see relatively exaggerated quiet, as extreme as what was witnessed in 2017.

The Santa Claus Rally

Perhaps the most recognizable seasonal pattern, the Santa Claus Rally, refers to the final trading weeks of December carried over into the opening days of the subsequent January. Historically, this window has produced above-average equity returns. While some ascribe the climb to the same ‘good vibes’ as is expected with the holiday, more pointed explanations range from performance chasing by fund managers to benign liquidity conditions and lower macro headline risk.

Chart of S&P 500 Monthly Seasonality for Performance and Volume Over Past 75 Years

Source: John Kicklighter, Standard & Poor’s

 

Monthly & Quarterly Patterns: Rebalancing and Expirations

As we tighten the timeframe, structural drivers become more prominent.

Fund Rebalancing

Institutional investors rebalance portfolios monthly or quarterly, depending on mandate. When equities have significantly out- or under-performed bonds, or vice versa, mechanical rebalancing flows can create measurable price pressure at month-end.

Derivatives Expirations

Futures and options contracts tied to major indices, commodities, and FX products expire on predictable schedules. Quarterly expirations - especially the period of convergence in expiries called ‘triple/quadruple witching’ - can bring pronounced volatility and volume spikes as positions unwind or roll to the next contract.

These flows are structural, recurring, and often powerful enough to influence both spot and derivative markets.

Chart of S&P 500 and Futures-Index Price Difference (Daily)
 
Source: TradingView, Standard & Poor’s, CME

 

Weekly Seasonality: The Impact of the Trading Cycle 

A similar rhythm plays out across the trading week. Market behavior often shifts into predictable phases:

Mondays: Heavy repricing as two to three days’ worth of news – over the weekend – necessitates a one-time repricing upon the Monday open.

Mid-week: Historically higher liquidity and trend continuation as traders become more vested into the systemic/thematic narratives of the week.

Fridays: Position squaring, profit-taking, and risk reduction ahead of weekend event risk by those with shorter holding periods or have lost conviction in an extended move.

These patterns are driven far more by ‘trader’ behavior and risk management constraints than by macroeconomic forces, but are frequent markets norms that arise all the same. 

Chart of Crude Oil Chart Through Multiple Weeks (8 Hour)
 
Source: TradingView.com, CME, John Kicklighter

 

Intraday Seasonality: The Rhythm of Global Sessions

While traders often think of seasonality in terms of annual or monthly cycles, some of the most consistent, time-based norms in price action occur within a single 24-hour cycle.

Global markets follow the sun as new financial centers come online and more eastern locations eventually close for the day. In chronological order, the major liquidity centers are Tokyo (Asia Pacific hours), London (European hours), and New York (Americas hours); and each carries its own contribution to the global rhythm.

• Tokyo session: The start of the ‘trading day’ following a gap since the US close with adjustment to previous day systemic fundamental developments. No real overlap to exchange hours in major European and American financial centers. Event risk concentrated near the open of the session and near the close.
• London session: The cumulative liquidity of mainland Europe, African and UK exchanges sees a significant increase in total liquidity. There is carry over interest from Asian investors looking to participate in Western/European markets for higher rates with higher credit rating in comparable assets. The afternoon session overlaps with the New York morning hours where the heaviest participation, turnover and volatility are realized in a standard day.
• New York session: The morning hours of the New York session (just before the official exchange open and including the first hours of trade) host the typical release of the most market-influential US event risk. This is where the greatest volatility is also realized. There is volatility into the afternoon session and close, but it tends to be significantly less.

These session-based patterns are not unique to equity indices. They are very much echoed in FX pairs, commodities, fixed income and more. So, while these are not often referenced as “seasonal” patterns, they carry the key factors and should be appreciated by market participants.

Chart of S&P 500 Emini Futures Divided into Major Global Financial Sessions (10 Minute)

Source: Tradingview, Standard & Poor’s

 

-- Experts: John Kicklighter, Global Head of Content; Matt Weller, Global Head of Market Research

 

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