How to Navigate the Market in the Last Trading Days of the Year
Despite a 78% win rate, the Santa Claus rally faces three major issues in the last few days of 2025.
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The last few days of trading in the year can be particularly difficult to navigate. Many professional investors close their books at Christmas and don’t even bother with the thin and random action.
Those who do participate are likely enticed by the hopes of catching some gains from the much-anticipated Santa Claus rally. The Santa Claus rally is supposed to occur in the last few trading days of the year, after Christmas and the first two trading days of January. The average return during that period for the S&P 500 is 1.3% which is about 1% better than average, and has occurred about 78% of the time. The best performance was in 2008-2009 when there was a 7.4% gain.
The problem for traders is that there are many other cross-currents at the conclusion of the year that create elevated volatility. There may be a 1% advantage from the Santa Claus rally, but it carries the cost of higher volatility.
While there are forces that tend to push stocks higher, others can cause abrupt selling as well. And though the period may have a history of gains, it also has a history of sudden selling.
There are three major issues at work in the last few days of the year. The first is tax planning. Some investors will want to offset gains by selling losing positions. That reduces some selling pressure on the biggest winners, which gives the market a slight upside bias.
The second issue is positioning for the new year. Big funds will report their returns for 2025 and will want to send a message about how they are positioned for what lies ahead. Some may even go completely to cash and start with a clean slate.
A third issue is that thin trading and positive bias tend to attract very short-term, aggressive traders looking to catch fast moves. We saw an example of this on Christmas Eve with silver and other metals, which is reversing hard on Monday.
There does not appear to be any major news catalyst, but mega-cap technology names are weak on Monday morning. This is likely due to positioning and tax moves rather than anything fundamental and illustrates how tricky the trading can be in the waning days of the year.
My game plan is to focus on protecting gains and keeping accounts close to highs. I’m not inclined to try to pad profits with short-term trades, but if an opportunity arises, I’ll go for it. It has been a good year, and I plan to keep it that way.
At the time of publication, Rev Shark had no positions in any securities mentioned.
