As the Indian stock market approaches its final trading days of the year, the perennial debate about the 'Santa Claus rally' is back in focus. Historical trends and fresh technical signals are converging to suggest that smaller companies might once again be the stars of this seasonal surge.
Historical Data Favours Smallcaps Heavily
Data compiled by SAMCO Securities reveals a compelling pattern over the last ten years. The Santa Claus period, defined as the last five trading days of December and the first two of January, has been exceptionally kind to smallcap stocks. This segment has delivered an average return of 3.55% during this window with a perfect 100% success rate, meaning they have never posted a loss in this period.
In comparison, midcap stocks recorded average gains of 2.63% with a 90% success rate. Large-cap stocks, represented by the Nifty 100, showed more modest average returns of 1.78%. A key takeaway is that the downside risk across all market segments has historically been limited during this phase, even in weaker years for the market.
"Smallcaps have been the biggest beneficiaries, with an average return of 3.55% and a 100% win rate, indicating uninterrupted gains during this seasonal window," stated Jahol Prajapati, Research Analyst at SAMCO Securities. He emphasized that the rally is a repeatable pattern fueled by improved sentiment, lighter trading volumes, and year-end portfolio adjustments.
Technical Setup Aligns with Seasonal Trend
For the current year, this historical tendency is finding support in technical charts. After a period of underperformance, the Nifty Smallcap 100 index is showing signs of a potential rebound. Analysts point to constructive price action, including two consecutive small-bodied candles with long lower shadows, which suggests buying interest at lower levels.
This is complemented by a positive crossover in the daily Relative Strength Index (RSI). "The crucial level to watch is the 20-day EMA zone of 17,450–17,500. If the index sustains above 17,500, it is likely to regain strong upward momentum, potentially leading to an extended pullback toward 17,800," explained Sudeep Shah, Head of Technical and Derivatives Research at SBI Securities.
Market breadth is also improving for smaller stocks. While 58% of Nifty stocks are above their 10-day simple moving average (down from 64%), the Nifty Smallcap 250 index saw a jump to 57% from just 39% a week ago. "This suggests that smallcaps have begun to catch up, encouraging a stock selective approach," noted Anand James, Chief Market Strategist at Geojit Investments Limited.
Broader Market Shows Signs of Stability
The broader Nifty index itself is exhibiting indications of finding a base. After moving along a declining trendline for nearly three weeks, the benchmark has held above the previous week's low. Sudeep Shah highlighted that the index has formed an Adam & Adam double bottom pattern, with its neckline resistance in the 26,050–26,100 zone.
"If Nifty manages a sustained breakout above 26,100, it would confirm the pattern and could very well trigger fresh bullish momentum, aligning with the typical Santa rally behaviour," Shah added. Anand James sees an initial upside target of 26,300 for the Nifty but cautions that failure to hold above 25,980 could lead to consolidation.
Jahol Prajapati reiterated the consistency of this year-end phenomenon, noting its reliability across market cycles. The convergence of strong historical performance, improving technical indicators, and seasonal liquidity factors is setting the stage for a potentially rewarding period for investors, particularly in the small and mid-cap space.
