Christmas Market Analysis: Analysts Warn of Bull Trap Risks in US Stocks, Real Opportunities Lie on December 28–31

U.S. stock index futures rose on December 21, but analysts warn that in the past 7 years, the “Christmas rally” has declined 6 times, averaging a fall of 4.2%. The real opportunity lies between December 28–31, as institutions rush to build a position for the January effect, coupled with the expiration of $23 billion in Bitcoin options.

The recent data debunking the Christmas market myth

(S&P 500 Futures, Source: Trading View)

The so-called Christmas rally, as defined by the “Stock Trader's Almanac”, refers to the phenomenon of the U.S. stock market rising during the last five trading days of December and the first two trading days of January of the following year. Since 1950, the S&P 500 has had a 77% chance of rising during this period, with an average return of 1.3%. The author of the “Stock Trader's Almanac”, Yale Hirsch, said in the 1970s: “If Santa Claus doesn't come, a bear market may descend upon Wall Street.”

However, recent data shows that this pattern is failing. In the past 7 years (2018-2024), there have been 6 instances of declines during the Christmas market. In 2018, it fell by 6.0% (panic from the trade war), in 2021 it fell by 8.6% (the shadow of Bitcoin crashing from $69,000), in 2022 it fell by 1.0% (the aftermath of the FTX collapse), in 2023 it fell by 0.3%, and in 2024 it plummeted by 10% (from $106,000 to $90,000). The only exception was in 2020 when it rose by 38.2%, but that was due to a post-pandemic liquidity flood, Grayscale's crazy buying spree, and MicroStrategy's massive purchases, which had nothing to do with Santa Claus.

Excluding the extreme situation in 2020, the average return over the remaining 6 years is -4.2%. The probability of an increase is only 16.7% (1 out of 7 times), and when it falls, it falls hard. This terrible data of “6 declines in 7 years” completely debunks the myth of “guaranteed profits during the Christmas market.”

Why has the Christmas market trend frequently failed in recent years? The market structure has changed. The increase in high-frequency trading and algorithmic trading has weakened traditional seasonal patterns. Institutional traders taking early vacations lead to a lack of liquidity at the end of the year, making the market more susceptible to large orders. Investors tend to lock in annual profits at the end of the year, with profit-taking pressure outweighing buying momentum. These structural factors make retail investors, who rely on “historical patterns,” prey for market makers.

Market Maker Harvest Script for December 24–25

Analysts warn that December 24-25 is a market maker's trap to lure in buyers, with a three-stage harvesting script. Stage one on the 24th: a morning rally creates the illusion that “the Christmas market really has arrived,” with technical indicators showing a breakout or rebound pattern. Various analysts begin to issue buy calls, stirring up retail investors' FOMO emotions, causing them to succumb to the temptation and chase the highs.

December 25th, the market closes: European and American markets are on holiday, and liquidity is dried up. Market makers can break through support levels with a small amount of chips. Due to extremely low trading volume, the impact of sell orders is amplified, and prices may plummet within minutes. Retail investors chasing highs are trapped at elevated levels, and they can't sell even if they want to. The New York Stock Exchange closes early at 1 PM on Christmas Eve, December 24th, and is closed all day on Christmas Day, December 25th. This shortened trading time makes harvesting easier to execute.

26-27 Mentality: Continuous declines have caused retail investors to anxiously cut their losses and exit the market. Daily small drops of 1-2% have accumulated to 5-10% over several days. Leveraged long positions are gradually approaching the liquidation line, and panic sentiment is spreading. Only after most retail investors have cut their losses does the market truly find a bottom.

A set of combination punches leads to retail investors' money ending up in market makers' pockets. This is not a conspiracy theory, but an inevitability of the market's microstructure. When retail behavior is highly predictable (everyone is waiting for the Christmas rally), market makers can exploit this expectation for reverse operations. Historical case: On December 24, 2021, the price of Bitcoin was $50,822, and the community shouted “the Christmas rally has arrived.” Some investors opened a 10x leverage long position with an investment of $50,000, without setting a stop loss. As a result, by January 3, 2026, BTC fell to $46,458, a drop of 8.6%, causing the 10x leverage position to be completely liquidated, leaving less than $7,000 from the initial $50,000.

Triple Opportunity Window from December 28 to 31

The real opportunity lies between December 28–31, with the core logic being institutions “rushing the January effect.” The traditional financial circle knows that the U.S. stock market's “January effect” (capital inflow, market rise) has a success rate of over 70%. Institutional traders have already started to layout in advance and will not wait until January 1 to take action.

On December 28 (Sunday), smart money on-chain acts first. The US stock market has not yet opened, but the crypto market trades 24/7, and whales will build a position in advance. Monitoring large on-chain transfers and exchange inflows and outflows can capture first-hand signals. If you see a large amount of USDT transferring from wallets to exchanges, or Bitcoin transferring out of exchanges (long-term holding), this is a sign of impending buying pressure.

From December 29 to 31, U.S. stocks will open, and it's the decisive moment for ETFs. Institutional traders are back, fully preparing for next year's performance. There is a high probability of significant capital inflow into Bitcoin and Ethereum spot ETFs. Data shows that even though the S&P 500 performed poorly in the first half of December, there is still a 77% chance of a rally during the Christmas market period (starting from the 28th). The starting point of this statistic may be misunderstood; the real uptrend often begins in the last few days of the month, rather than on the 24th or 25th.

$23 billion Bitcoin Options expiring on the 26th is a key variable. Before the options expire, the market will be “pinned” at a certain price level (usually the strike price of the maximum open interest), but after expiration, this constraint disappears, making it easier for prices to form trending movements. The influence of the options on the 28th-31st has been eliminated, and the long-short speculation directly fills the gap, amplifying volatility and creating trading opportunities.

Gabelli Funds portfolio manager Justin Bergner's observation is extremely accurate: “The end of the year feels more like back-and-forth fluctuations.” These fluctuations are not random, but systematic: a downward fluctuation washout from the 24th to the 27th, and an upward fluctuation to build a position from the 28th to the 31st. Understanding this rhythm allows us to turn passivity into proactivity.

Artificial intelligence-related stocks rebounded last week after a recent pullback. Oracle's stock price surged significantly as TikTok agreed to sell its U.S. business to a new joint venture that includes Oracle. Nvidia's stock price also saw a rebound. However, investors are closely watching whether AI stocks can maintain their leadership as the year comes to a close, especially amid concerns about the high valuations of tech stocks, with funds rotating into cheaper sectors.

The performance of the S&P 500 in the first half of December this year has been poor, showing a downward trend since the beginning of the month. However, investors should not give up hope for the Christmas rally. History shows that regardless of how December performs earlier, if we calculate from the last few days of the month, the U.S. stock market has traditionally performed well at the end of the year. The key is to understand the true starting point of the “Christmas rally”: it is not on the 24th-25th, but rather the window for building a position after institutions return and options expire from the 28th to the 31st.