Why the FTSE and DAX are the best stock indices for a Santa rally

There are just two global indices that consistently enjoy a healthy Santa rally, almost every year. The UK 100 (FTSE 100 underlying) and Germany 30 (DAX 30 underlying).

The UK 100 has closed higher every December for the last 11 years, and when taking the data back even further, has only closed the month lower twice in two decades. On an average basis, the UK 100 rallies 2.1% every December, and this figure is even higher at 2.6% when you take out those two losing years (2002 and 1994). At current prices, and assuming the UK 100 continues on historical form, which could mean the UK 100 closes 2014 between 6876 and 6917, this would leave the index at its highest point for the year.

The historical consistency that the UK 100 has performed at in December is outstanding, especially when compared to how other global indices have fared during the same month and timeframe. Over the same period, only the Germany 30 (DAX 30 underlying) has performed as well, albeit a weak 2011 has pushed the UK 100 to the top of the table.

“Both the UK 100 and Germany 30 have a 90% rally ratio since 1994.”

Apart from the UK 100 and Germany 30, there is no other major global index that has a higher rally ratio for December when looking back across two decades.

What does this mean?

First and foremost, it’s important to add the disclaimer that past performance is no guarantee of future performance. That being said, the sheer consistency in these numbers makes a compelling case. Aside from the historical trend that is plain to see, there are fundamental factors behind a Santa rally too. Factors that may influence a bullish December market include:

• Bonus season – many employees typically receive their bonuses at this time of year. This can have two positive impacts on the market: First and foremost, those who receive cash bonuses typically seek to invest at least some of this and stocks are a natural attraction. Secondly, some bonuses may be paid as equity or stocks which have locked down periods associated with them.
• Portfolio re-adjustment – at the end of the year, many retail investors, institutions and fund managers reassess their portfolios for the year-end. This could result in investing in different asset classes, including stocks.
• Cash re-investment – investors who have made cash throughout the year that’s sitting on their books look to re-invest that cash into assets for the coming year.
• Low volumes – December typically sees very low market volumes, as most are away from the market enjoying a well-earned beer, turkey or holiday. With that in mind, low market volumes mean that it won’t take much for an above-market-size order to come in and spike prices. In short, trades that aren’t used to causing positive or negative ripples in the market do so in December, and prices can ride the wave of this ripple higher or lower much more easily.

So despite the bad start to the month that saw the UK 100 lose more than 1%, the historical trends and fundamental factors listed above could see the UK 100 (and Germany 30) enjoy another positive December.