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Kaeppel's Corner: Happy New Year! (At Least in Theory)

By Jay Kaeppel, Optionetics.com | Thu December 27, 2012 6:16AM PT

 

As I discussed last week regarding the Christmas Holiday, the stock market has long shown a tendency to perform well around major stock market holidays.  The six-day Christmas period I wrote about last week ends at the close of trading on Friday 12/28.  So far the Dow is down -1.1%.  Which reminds me to repeat once again that the one big problem with seasonal trends is that there is never any guarantee that they will work the next time around. 

Also, they are susceptible to fail in the face of fiscal cliffs.  Well, OK, that’s just a new theory that I am testing out this time around. 

In any event, this week let’s look at the six trading days surrounding New Year’s Day

 

The New Year’s Holiday Period

Once again I turn (enthusiastically self-servingly) to the research I did for my book, “Seasonal Stock Market Trends”, where I looked at the six day trading period surrounding all major stock market holidays.  This six-day period is comprised of the three trading days just prior to and the three trading days directly following major holidays.  The results achieved during the six-day New Year’s day holiday period have been fairly compelling. 

The results in Figure 1 display the cumulative percentage gain achieved by investing in the Dow Jones Industrials Average only during the three trading days before and the three trading days after every New Year’s Day starting with New Year’s Day 1949.  The cumulative gain of +105.6% actually exceeds the cumulative gain generated during the three trading days before and after Christmas as discussed last week. 

(For the record, these two periods are typically not mutually exclusive.  In other words there is usually some overlap where the one or more of the three trading days after Christmas intersect with the three trading days prior to New Year’s Day.  This year, 12/27 and 12/28 fall into the three trading days after Christmas and the three trading days prior to New Year’s Day.  More on this in a moment).

Figure 1 – Cumulative % gain from investing in Dow Jones Industrials three trading days before and three trading days after each New Year’s Day (Dec 1948 to present)

 

A Few Figure of Interest

To better appreciate the tendency for the stock market to perform relatively well around New Year’s let’s consider a few facts and figures: 

Measure

6-day New Year Period

ALL 6-day periods

Average % +/(-)

+1.16%

+0.19%

Median % +(-)

+1.28%

+0.31%

# Times Up

47

9055

# Times Down

16

7155

% Time UP

73.4%

55.9%

Maximum % +(-)

+7.2%

+17.7%

Minimum % +(-)

(-5.5%)

(-30.5%)

Figure 2 – New Year’s Holiday Period versus all 6-day periods

As you can see, compared to the “average” 6-day trading period, the New Year’s holiday period looks pretty darn good.  The average 6 trading day return for the New Year’s holiday period is almost 6 times as great as the “average” average 6-day trading period (+1.16% vs. +0.19%).  Likewise, the 6-day Christmas holiday period has showed a gain 73.4% of the time versus the 55.9% for the average 6-day trading period.

 

Playing the Game

The six day New Year’s holiday period for 2012 begins at the close of trading on Wednesday, December 26th and extends through the close on Friday, January 4th.

The most straightforward to play would be to buy a Dow index fund such as the ETF ticker DIA.  Other possibilities include S&P 500 index funds such as SPY. 

In addition, aggressive traders (who do not fear “the cliff”) can consider more aggressive options such as a leveraged index fund like ETF ticker DDM (trades daily Dow Industrials x 2) or stock index futures.

 

The Combined Holiday Seasonal Period

Now that we have established that there is invariably an overlap between the six-day Christmas and six-day New Year holiday trading periods, let’s look at the Christmas and New Year’s holiday trading periods as one combined entity. So in this case:

Holiday Trading Period extends from 3 trading days prior to Christmas through the 3rd trading day of the New Year.

This typically totals roughly 10 trading days.  For example, this year the Holiday Trading Period extends from the close of trading on Wednesday, December 19th through Friday, January 4th.

The cumulative gain for this period since 1948 appears in Figure 3.

Figure 3 – Cumulative % gain from investing in Dow Jones Industrials three trading days before Christmas until the end of the third trading day after New Year’s Day (Dec 1948 to present)

A glance at Figure 3 reveals why Scrooge was able to get away with being a jerk all those years.  

Measure

Holiday Trading Period

ALL 10-day periods

Average % +/(-)

+1.91%

+0.31%

Median % +(-)

+1.72%

+0.53%

# Times Up

52

9336

# Times Down

12

6874

% Time UP

81.3%

57.6%

Maximum % +(-)

+13.4%

+18.8%

Minimum % +(-)

(-3.9%)

(-34.1%)

Figure 4 – Holiday Trading Period versus all 10-day trading periods (Dec 1948-Present)

 

Summary

The implication of all of this is that the stock market – in theory – may well post a gain between December 19th and January 4th.  Of course – and as always – the remaining question is will “theory and reality” intersect this time around.  It is certainly easy – and perhaps even prudent - to worry that this time around, the looming fiscal cliff will push the stock market over the edge right around New Year’s.

As always, time will tell.

Wishing you a Happy and Prosperous New Year (I for one am ready to go - and pay no atttention to that bungee cord around my waist........).


Jay Kaeppel

Staff Writer and Trading Strategist

Optionetics.com ~ Your Options Education Site

 


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