The lights, carols and the last FOMC of the year, you know the drill by now, Christmas is here soon!
As we head into the year's end, it's the perfect time to revisit an old idea we had last Christmas. In our piece last December titled “Is the Santa Claus rally real?” we explored the concept of the Santa Claus rally, discussing why and how a modified version might work.
To recap, last year we proposed examining the Santa Claus rally through a spread between the S&P500 and the Nikkei, rather than focusing solely on either the S&P or Nikkei alone. This approach was based on several reasons:
1) Holiday Impact: The Christmas holiday holds greater cultural importance in the US, likely resulting in more holiday observance in the US compared to Japan.
2) Diverging Monetary Policies: The Bank of Japan is set to meet next week, and while no change in the policy rate is expected, we're looking for any hints on the timing of an exit from negative interest rates. Conversely, the Federal Reserve has just signalled expectations of up to 75bps rate cuts in 2024, marking a policy shift. These differing policies could influence equities in their respective markets differently.
3) Difference in Accounting/Financial Years: Different accounting practices and book closure dates mean that institutional traders in each market will have varying flows as they prepare to close positions for the financial year.
4) January Effect Front-Running: Investors re-establishing positions after December's tax loss harvesting.
With policy directions now swapping, optimism for this strategy's success is higher this year. The Federal Reserve signalling an end to hikes, has resulted in the S&P500 surging closer to previous all-time highs.
Meanwhile, the USDJPY has collapsed from its high of 152, as views grow that the BOJ might end its negative interest rate policy sooner than expected, as alluded to by BOJ Governor Ueda.
This Christmas, we'll compare what happened last Christmas to see if a similar pattern emerges this year.
A review of last year's Christmas effect shows that the spread rose roughly 12% from mid-December to mid-February.
This result adds to the current streak of a 60%-win rate since 2013, now improving to 63% with a simple average return of about 33%.
Examining each index individually, we find that periods where the S&P 500’s RSI is above 75 and the Nikkei 225’s RSI is around 50 have generally preceded critical junctures where the S&P 500 continues to rise while the Nikkei remains rangebound or falls.
Additionally, observing the S&P500 and Nikkei 225 spread, we notice an ascending triangle pattern, with current price action breaking above. An ascending triangle is typically associated with bullish continuation.
Considering the broad macro factors, such as changing monetary policy stances aligning with the historical behavior of the Santa Claus rally, along with a bullish technical setup, we lean bullish on this spread. To express this bullish view, one could go long on the E-mini S&P 500 Futures and short on the Nikkei/USD Futures. At the current price levels, the notional value of one S&P 500 Futures contract is 4771*50 = 238550 and the notional for the Nikkei futures is 33010*5 = 165050, hence to match the notional we can trade 2 S&P 500 Futures contracts against 3 Nikkei Futures contract with the intent of holding the position from now till the middle of February.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
www.cmegroup.com/mar...0.contractSpecs.html
www.cmegroup.com/mar...r.contractSpecs.html
www.fool.com/investi...s/santa-claus-rally/
www.jstor.org/stable/24465409
As we head into the year's end, it's the perfect time to revisit an old idea we had last Christmas. In our piece last December titled “Is the Santa Claus rally real?” we explored the concept of the Santa Claus rally, discussing why and how a modified version might work.
To recap, last year we proposed examining the Santa Claus rally through a spread between the S&P500 and the Nikkei, rather than focusing solely on either the S&P or Nikkei alone. This approach was based on several reasons:
1) Holiday Impact: The Christmas holiday holds greater cultural importance in the US, likely resulting in more holiday observance in the US compared to Japan.
2) Diverging Monetary Policies: The Bank of Japan is set to meet next week, and while no change in the policy rate is expected, we're looking for any hints on the timing of an exit from negative interest rates. Conversely, the Federal Reserve has just signalled expectations of up to 75bps rate cuts in 2024, marking a policy shift. These differing policies could influence equities in their respective markets differently.
3) Difference in Accounting/Financial Years: Different accounting practices and book closure dates mean that institutional traders in each market will have varying flows as they prepare to close positions for the financial year.
4) January Effect Front-Running: Investors re-establishing positions after December's tax loss harvesting.
With policy directions now swapping, optimism for this strategy's success is higher this year. The Federal Reserve signalling an end to hikes, has resulted in the S&P500 surging closer to previous all-time highs.
Meanwhile, the USDJPY has collapsed from its high of 152, as views grow that the BOJ might end its negative interest rate policy sooner than expected, as alluded to by BOJ Governor Ueda.
This Christmas, we'll compare what happened last Christmas to see if a similar pattern emerges this year.
A review of last year's Christmas effect shows that the spread rose roughly 12% from mid-December to mid-February.
This result adds to the current streak of a 60%-win rate since 2013, now improving to 63% with a simple average return of about 33%.
Examining each index individually, we find that periods where the S&P 500’s RSI is above 75 and the Nikkei 225’s RSI is around 50 have generally preceded critical junctures where the S&P 500 continues to rise while the Nikkei remains rangebound or falls.
Additionally, observing the S&P500 and Nikkei 225 spread, we notice an ascending triangle pattern, with current price action breaking above. An ascending triangle is typically associated with bullish continuation.
Considering the broad macro factors, such as changing monetary policy stances aligning with the historical behavior of the Santa Claus rally, along with a bullish technical setup, we lean bullish on this spread. To express this bullish view, one could go long on the E-mini S&P 500 Futures and short on the Nikkei/USD Futures. At the current price levels, the notional value of one S&P 500 Futures contract is 4771*50 = 238550 and the notional for the Nikkei futures is 33010*5 = 165050, hence to match the notional we can trade 2 S&P 500 Futures contracts against 3 Nikkei Futures contract with the intent of holding the position from now till the middle of February.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
www.cmegroup.com/mar...0.contractSpecs.html
www.cmegroup.com/mar...r.contractSpecs.html
www.fool.com/investi...s/santa-claus-rally/
www.jstor.org/stable/24465409
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