The month of December is typically known for being a relatively favorable trading period, with buy signals often being plentiful as the year draws to a close.

Perhaps the most common phrase used to describe the late-December rise in prices is the Santa Claus rally.

According to the definition of the Santa Claus rally found in the Stock Trader Almanac, it is the last five trading days of the year plus the first two trading days of January. This is not to be confused with another phenomenon known as the January Barometer.

Far from being a simple period of increased volatility, the Santa Claus rally is usually a fairly positive experience for many traders.

During this period, there is an increased likelihood of bullish moves. To illustrate this, editor in chief of the Stock Trader’s Almanac Jeff Hirsch reports that since 1950, the S&P 500 (SPY) has seen average gains of 1.5% during the last week of the year.

Hirsch describes the Santa Claus rally as “Not a big gain, but a nice little positive,” going on to say that there is a “[…] general buying bias by the pros at the end of the year after tax-loss selling.”1

So while it is probably not wise to expect some kind of Christmas miracle during this period, it might be a good idea to predominantly be on the lookout for signals for favorable long positions.

Perhaps more important than simply using the Santa Claus rally to catch a few good trades, this period does help to set the tone, so to speak, for a trading conditions of the coming year.

Jeff Hirsch sums this up very nicely in a jingle his father created which goes something like this: “If Santa Claus should fail to call, there is may come to Broad and Wall.” 1

What this basically means is that if the seven-day period turns out to be negative then the beginning of the New Year is unlikely to get off to a very positive start.

On the other hand, if you are looking to take advantage of the Santa Claus rally this December then top rated stocks, particularly those in the retail sector, may worth a look at.

Stocks such as the A-rated Signet Jewellers Ltd (SIG) and Tiffany & Co (TIF) with its B- rating are expected to realize gains during the Christmas period, with strong retail companies in general experiencing favorable conditions throughout the holidays.

Other examples include C+ rated GNC Holdings Inc (GNC) and Winmark Corp (WINA) which has a B- rating, as rated by TheStreet.