Holiday Seasonality (20:23)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 20, No. 23 on December 9, 2011. 

This is the time of year when even the media talks about seasonality. Of course, that doesn’t mean they understand what they’re talking about. Why would it be different on this subject than any other?

We have frequently mentioned the positive seasonality that takes place between Thanksgiving and Christmas. It’s unclear exactly why this happens, but it does. In fact, this particular seasonality doesn’t even have a cute name. But it certainly seems to work.

The table above shows the data on the magnitude of post-Thanksgiving rallies over the past 20 years. The “Date” in the table is the date of the maximum gain from the day after Thanksgiving through the end of the year. The other two columns show the number of points of the gain and the percentage return on that date.

You can see that, in many years, these moves were sizeable. This year’s 96.7-point rally in $SPX, so far, is a case in point. Only 2002 had no rally at all, and it would probably have been difficult to make any money from a long position with a trailing stop in 1993, 1996, and 2005. Even so, there were plenty of years that sizeable profits could have been registered.

This seasonality, plus an oversold condition, were what spurred us to buy the $SPX calls we held in Position S640 (we sold after an 85-point $SPX rally).

I wrote earlier of liking to know why a system or seasonality works. For example, in the “October Seasonal” trade that we often take, it is based on the fact that institutional investors have to buy back into the market by the end of October. This one, however, is a bit difficult to explain in logical, fundamental terms. Other than perhaps to say that professional money managers are paid based on yearend prices, and they spend the month of December trying to raise those prices as much as possible.

Other Holiday Seasonals

It should be noted that the above seasonal pattern is not one of those that is widely publicized, nor does it have any of the familiar names. Most people are familiar with the names of these other seasonal patterns, although most would be hard-pressed to explain the differences. Many of these are explained in the Stock Trader’s Almanac:

Santa Claus Rally

– encompasses the period of the last 5 trading days of one year and the first 2 of the next. The market usually moves higher over this seven-day period, but if it doesn’t, that can be a bearish warning signal. Ironically, this takes place after Christmas, even though most media talk about it as the period leading up to Christmas.

January Effect

– originally, the phenomenon in which small-cap stocks bounce back in January after tax-loss selling in December. For a while, it moved into December as traders raced to anticipate the effect. In recent years, it seems to have almost completely disappeared.

January Barometer

– the use of the market results of the first month of the year as a predictor for the entire year. Also, the first week of the year can be used in a similar fashion, called the January Early Warning System.

This article was originally published in The Option Strategist Newsletter Volume 20, No. 23 on December 9, 2011.