One of the biggest questions that comes up during this time of year is “do you believe?” Well, youthful ignorance is often bliss when thinking about this. 

The easy, and quite frankly “in the spirit of the season” answer is, “yes, I believe.” Other skeptics — call them Scrooges — claim that there’s no evidence to prove its existence.

As always, I tend to look at the numbers and charts in order to uncover the truth and whether it can make you money. I’m talking about the end-of-year seasonality, often referred to as the “Santa Claus rally.”

One of the more talked about seasonal events is that the final days of the year often sway stocks higher. Believe it or not, there is a clear bias to the market’s year-end move, a bias that you can use to generate short-term profits.

Let’s look at the data via the historical price movements in the S&P 500 Index (SPX). Looking back to 1950, the SPX has consistently generated better-than-average returns in the last few weeks of the year. On any given week since 1950, the SPX moves higher 56% of the time, which underscores why the market moves higher over the long term.

But isolating the last two weeks of each of these 58 years shows that the market is up almost 70% of the time, thanks to last-minute traders pushing the market higher.

In addition to the increasing frequency of positive returns, the average weekly return during these last two weeks also rises. During the same 58-year period, the market moves higher by an average 0.1% in any week. Looking at the positive trading bias of the year-end trade, we see an average weekly return of 1.3%, a huge jump over the average return.

What does all of this mean?

Well, Virginia, it confirms that there is basis for investors to believe in the power of a Santa Claus rally. Better yet, there’s room to benefit from the seasonal phenomenon.

Short-term investors who’d like to leverage the potential market move as we roll toward the “Santa bump” should consider using at-the-money options on the Russell 2000 Index (RUT) (chart below) or S&P 500. For example, the iShares Russell 2000 Index (IWM) Jan 61 Calls (DIWAI) are selling for around $1.30 ($130 per contract). This option offers an opportunity to ride Santa’s sleigh for the next few weeks.

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