A Quick Glossary of Stock Market Holiday Terms (14:22)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 14, No. 22 on November 23, 2005. 

As we enter the holiday season, the media will mix and match terms referring to the various Holiday-related trends of the stock market. They rarely get it straight, and as a result, they wind up confusing a lot of people. Here are the major ones:

Santa Claus rally – this specifically refers to the period encompassing the last 5 trading days of one year and the first 2 trading days of the next year. It does not refer to the period leading up to Christmas. In fact, it takes place after Christmas. But try telling that to CNBC.

January Effect – the phenomenon by which small cap stocks tend to outperform big cap stocks. Originally, this effect took place mostly in January, but in the last 15 years or so, the effect has moved “forward” so that it now begins in December and ends in early January – if it occurs at all.

There are actually a couple of ramifications of the January Effect, and we’ll address them in more detail in the next issue. The total dominance of big caps by small caps in recent years has blurred the effectiveness of this once very trustworthy effect. We are conducting research to see if there is a viable way to play the spread this year – or if it has completely lost its effectiveness.

January Barometer – refers strictly to using January’s performance as a predictor of the performance of the stock market for the entire year. It is extremely accurate – getting it right about 80% of the time. For this year, though, January predicted a down year, and it doesn’t look like that’s going to happen.

January Early Warning System – this refers to what the market does in the first 5 trading days of a new year. It has been amazingly accurate, for such a short time period, getting the market’s direction right in 50 of the last 55 years. However, it too predicted a down year this year, which doesn’t appear likely now.

Both of the above two January systems have received some criticism since they include the January gain in their “prediction” for the rest of the year. However, it only makes a difference in about 3 or 4 of the past years.

Summary

So, there you have it – four different end-of-the-year or beginning-of-the-year patterns that have long and relatively successful track records. Whether you can trade them for profit is another matter, but at least you’ll be able to keep them straight – better than most of the media can do.

This article was originally published in The Option Strategist Newsletter Volume 14, No. 22 on November 23, 2005.