The "Santa Claus Rally" used to refer to a rise in equity prices during the week between Christmas and New Years.

But just like shopping for the holidays, the modern Santa Claus rally now seem to take hold a lot earlier in the year.

In 2016, the traditional increase in equity prices associated with the Santa Claus rally appears to have been supercharged by the continuing "Trump Rally."

While most media outlets are talking about the 1,000 point rise in the Dow Jones Industrial Average (DJIA) in about a month, the Trump Meets Santa Claus rally has actually been a lot more substantial.

Since November 4th of this year, which was only a handful of days before Donald Trump won the US Presidential election in shocking fashion, the DJIA has now risen from roughly 17,900 to 19,700.

That's about 2,000 points (or 10%) in under two months.

To put that in context, Bloomberg estimates that since May 2013 it's taken the DJIA on average 324 days to rise 1,000 points, and in November-December 2016 we've seen almost 2,000 points in under 60 days.

Food for thought.

Looking at the VIX, long time tastytraders won't be surprised to see that it got crushed during the post-election rally. Spiking to 6-month highs (over 22) in early November, the VIX settled below 12 in mid-December.

Removing the typical holiday euphoria component of this rally (the Santa Claus factor) which likely only accounts for a small fraction of the recent increase in equity prices, we're left with Donald Trump's election as President in the United States accounting for the balance.

Sentiment suggests that President-elect Trump's intention to reduce corporate taxes combined with plans for a stimulus package focused on improving the country's aging infrastructure are a couple key reasons why stock prices have been rallying.

Stock values are theoretically driven by the robustness of their earnings, and with Trump's plans potentially impacting both the top line (increased revenues) and bottom line (reduced taxes), there's certainly some reason to believe a rise in equity prices is warranted.

On the other hand, gradually rising interest rates in the United States could work counter to the above positives due to a relatively stronger US Dollar. The US Federal Reserve is expected to raise benchmark interest rates in the United States by a quarter percent at their last meeting of the year on December 14th.

With many other central banks around the world maintaining ultra-low interest rates in the foreseeable future, a stronger US Dollar could create complications for companies in the United States with a large percent of revenues tied to overseas business.

Toss in the fact that Trump has stated repeatedly his intention to renegotiate some of the country’s most important trade deals, and earnings forecasts for 2017 and beyond get even more difficult to predict.

A new episode of Market Measures contains a study conducted by tastytrade that highlights the high rate of success when selling VIX at levels above 20 in recent history. We hope you'll take the time to review the entire episode when your schedule allows.

While nobody knows what the future holds for global financial markets, with the VIX currently sitting below 12, and a lot of uncertainty going into 2017, one wonders if selling puts in the VIX may be one possible course of action in the near-to-mid term.

No matter what approach you decide to take for the balance of the year, we hope you'll reach out with any questions or comments at support@tastytrade.com.

We look forward to hearing from you!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.