AI
Thursday, December 09, 2004 11:28:07 PM
The "December Effect"
by Ryan Jones
FutureSource's newsletter for traders, "Fast Break."
Most traders and investors have heard of the "December Effect" in which stocks generally have shown to move higher during the month of December. The most common reason given to this opportunity is based on capital gains taxes. Profitable stocks won't be sold during December to put of the capital gains tax. Maybe, maybe not.
Regardless, there is much more to the story than just buying at the beginning of December and exiting at the end in order to take advantage of this seasonal situation. Rather than deal with the "whys" of this supposed stock buying frenzy, I am going to stick with the cold hard facts, price action.
I am also going to limit this article to addressing the most common stock index, the S&P 500, rather than look at addressing certain groups of stocks or making the difference between losing stocks and winning stocks. The reason is because the focus is how to profit on the short-term from the so-called "December Effect".
To begin with, I want to give you the overall numbers of the market movement during the month of December since 1991:
These numbers are quite solid. 79% of the time, the month of December has moved higher by a total of approximately 213 points. Only four times, though, has the market made a move of more than 2%. Regardless, there is clearly something to the "December Effect" based on these numbers, especially when you consider the fact that the only other month that saw the market move higher 79% of the time was October.
You can also take a look at these numbers and compare them to the overall increase in the S&P since 1991. The market was at about 370 in December, 1991. Today, it is at 1190. Total increase is at 820 points. 213 points, or 26% of the total move, came from the month of December alone. This represents being in the market only 8% of the time for 26% of the total return.
The stats don't lie. Historically there has been a "December Effect". However, there are much better ways of taking advantage of this (should it continue in the future), than simply buying the index and holding for a month. As you will see, there are a couple of key times during the month of December that have shown a consistency for the market to move higher. Likewise, there is also a key time when the market has shown consistency to moving lower as well. If you can concentrate on buying during the key times when the market moves higher and simply stay out of the market during key times that it has moved down, the returns above can be increased dramatically.
Key Times WhenMarket Has Moved Higher During December:
December 1st
The first key period is December 1st. When simply buying on the open and exiting on the close on the 1st day of December, the market has produced a total of 54.00 points over the last 14 years while winning 70% of the time. That is 25% of the total of 213 points during the entire month of December, on just one day. This is also consistent with the fact that buying the first day of the month on all months has shown strong profits as well. December certainly fits right in that scenario.
First Week of December
We can take the information above and extend that into the entire first calendar week of December as well. If simply buying on the open of the first day of the month (or first trading day), and exiting after 5 trading days, the total profit has been approximately 96 points while being higher 70% of the weeks. Buying the first week of December provides 45% of the total 213 point return from buying on the first day of the month and exiting after the last day of the month.
Before and After Christmas
There has been a general bias to buying the market a few days before Christmas, and a few days after. Generally from about the 21st (or the first trading day thereafter) through the close on the 27th (or on the open of the first trading day thereafter) the market has shown strong moves to the upside. In fact, over the last 14 years the market has moved up during that time period 85% of the time by a total of 208 points! This short time period (generally covering 3 days before Christmas and 2 days after) accounts for more than 25% of the total move up the market has made from 1991 to present day. In other words, being in the market less than 2% of the time makes up more than 25% of the total move since 1991.
To summarize, 32.5% of the total market move from 1991 to present has come from being in the market during the first week of December and then again a few days before and after Christmas. If you take away these crucial days, there would be no "December Effect", and in fact, the market has been down a total of 88 from 1991 to present when not being in the market during the above key buying times!
Selling Periods
One thing that traders need to understand about the "December Effect" is that it is a seasonal. Many traders have a really good sounding explanation for why the "December Effect" exists, or why the market has moved higher during the month of December in the past. However, just as convincing as the numbers are for buying at key times during December, there is also one key selling period.
Second Week of December
There are generally five trading days during any given week. The first calendar week is represented by December 1st through the 7th. The 8th starts the second calendar week. It also represents the 6th trading day. Between the beginning of that 6th trading day in December and the last day of that week, the market has moved DOWN 70% of the time by a total of 140 points over the last 14 years!
Combined December Seasonal Trades Based on December
Based on just three time periods, two buying and one selling, December has been pretty much defined. Overall, the market is up about 820 points since late November1991. By limiting trades to just the three opportunities given above, it has produced over 400 points in movement since 1991.
Clearly, the reasoning that is usually given for the "December Effect" does not explain why the second week of the month is so bearish. If December was the only month to show these kind of consistent tendencies, I might be a little more inclined to fall in line and say that the consideration of capital gains taxes are why the "December Effect" exists.
However, as I pointed out earlier, there is at least one month that is as bullish, if not more, than December. October has been higher 79% of the time since 1991 as well. However, the degree that the market has been higher is by 316 points, almost 1/3RD MORE than the month of December. Any tax benefits from that? (Oh, I know, there are probably funds buying at the beginning of the 4th quarter to make up losses that occurred from the summer months, or something that sounds good like that).
Then there is also Christmas. Why would the bullish run end just a couple of days after Christmas instead of going until the last day of the month, or at least the last couple of days? In fact, the market is slightly bearish on December 30th and 31st. Perhaps there is a good explanation, but that doesn't explain why the market is so bullish the first several days after July 4th as well.
Regardless of reasons, traders need to realize that there is solid evidence that seasonal influences in the stock market, and specifically the stock indexes, play a major role in price movement over the short-term. In this article alone, I have given four different trading periods and seasonals that have produced market movement almost equaling the total market movement from 1991 to the present. There may be questions as to why the market moves the way it moves in December and other times during the year, but you can't argue with the cold hard facts that the market HAS made these moves.
About the Author
Ryan Jones is considered one of the trading industries "most complete traders".
Starting his trading career at the early age of 16, he had traded nearly every major market and strategy by the age of 21. At the age of 26, Ryan signed a book deal with John Wiley making him one of the youngest authors ever in the field of futures trading. His book, The Trading Game, Playing by the Numbers to Make Millions is still considered to be the authority on the subject of trading and money management by many leading traders. Ryan's advanced experience and knowledge across many trading fields such as Technical Analysis, Option Trading, Money Management and the S&P have lead to several trading feats, including turning a $15,000 account into over $107,000 in less than 90-days short-term trading the S&P (real money).
For Our Fast Break Readers
Sign up for your complimentary month of "S&P Probability Analysis" emailed daily and we'll rush you the "S&P Day of Week" report today.
Looking at seasonal factors or pattern influences alone are both pretty amazing. But the real key is combining these two major influences. Each day Ryan Jones formulates his "S&P Probability Analysis" from seasonal factors that might influence market action AND current short-term patterns. For a limited time you can get this great analysis on a complimentary basis and we'll also send a complimentary "S&P Day of Week" report. Sign up today! http://partners.futuresource.com/offers/rjo_dayofweek.jsp
by Ryan Jones
FutureSource's newsletter for traders, "Fast Break."
Most traders and investors have heard of the "December Effect" in which stocks generally have shown to move higher during the month of December. The most common reason given to this opportunity is based on capital gains taxes. Profitable stocks won't be sold during December to put of the capital gains tax. Maybe, maybe not.
Regardless, there is much more to the story than just buying at the beginning of December and exiting at the end in order to take advantage of this seasonal situation. Rather than deal with the "whys" of this supposed stock buying frenzy, I am going to stick with the cold hard facts, price action.
I am also going to limit this article to addressing the most common stock index, the S&P 500, rather than look at addressing certain groups of stocks or making the difference between losing stocks and winning stocks. The reason is because the focus is how to profit on the short-term from the so-called "December Effect".
To begin with, I want to give you the overall numbers of the market movement during the month of December since 1991:
These numbers are quite solid. 79% of the time, the month of December has moved higher by a total of approximately 213 points. Only four times, though, has the market made a move of more than 2%. Regardless, there is clearly something to the "December Effect" based on these numbers, especially when you consider the fact that the only other month that saw the market move higher 79% of the time was October.
You can also take a look at these numbers and compare them to the overall increase in the S&P since 1991. The market was at about 370 in December, 1991. Today, it is at 1190. Total increase is at 820 points. 213 points, or 26% of the total move, came from the month of December alone. This represents being in the market only 8% of the time for 26% of the total return.
The stats don't lie. Historically there has been a "December Effect". However, there are much better ways of taking advantage of this (should it continue in the future), than simply buying the index and holding for a month. As you will see, there are a couple of key times during the month of December that have shown a consistency for the market to move higher. Likewise, there is also a key time when the market has shown consistency to moving lower as well. If you can concentrate on buying during the key times when the market moves higher and simply stay out of the market during key times that it has moved down, the returns above can be increased dramatically.
Key Times WhenMarket Has Moved Higher During December:
December 1st
The first key period is December 1st. When simply buying on the open and exiting on the close on the 1st day of December, the market has produced a total of 54.00 points over the last 14 years while winning 70% of the time. That is 25% of the total of 213 points during the entire month of December, on just one day. This is also consistent with the fact that buying the first day of the month on all months has shown strong profits as well. December certainly fits right in that scenario.
First Week of December
We can take the information above and extend that into the entire first calendar week of December as well. If simply buying on the open of the first day of the month (or first trading day), and exiting after 5 trading days, the total profit has been approximately 96 points while being higher 70% of the weeks. Buying the first week of December provides 45% of the total 213 point return from buying on the first day of the month and exiting after the last day of the month.
Before and After Christmas
There has been a general bias to buying the market a few days before Christmas, and a few days after. Generally from about the 21st (or the first trading day thereafter) through the close on the 27th (or on the open of the first trading day thereafter) the market has shown strong moves to the upside. In fact, over the last 14 years the market has moved up during that time period 85% of the time by a total of 208 points! This short time period (generally covering 3 days before Christmas and 2 days after) accounts for more than 25% of the total move up the market has made from 1991 to present day. In other words, being in the market less than 2% of the time makes up more than 25% of the total move since 1991.
To summarize, 32.5% of the total market move from 1991 to present has come from being in the market during the first week of December and then again a few days before and after Christmas. If you take away these crucial days, there would be no "December Effect", and in fact, the market has been down a total of 88 from 1991 to present when not being in the market during the above key buying times!
Selling Periods
One thing that traders need to understand about the "December Effect" is that it is a seasonal. Many traders have a really good sounding explanation for why the "December Effect" exists, or why the market has moved higher during the month of December in the past. However, just as convincing as the numbers are for buying at key times during December, there is also one key selling period.
Second Week of December
There are generally five trading days during any given week. The first calendar week is represented by December 1st through the 7th. The 8th starts the second calendar week. It also represents the 6th trading day. Between the beginning of that 6th trading day in December and the last day of that week, the market has moved DOWN 70% of the time by a total of 140 points over the last 14 years!
Combined December Seasonal Trades Based on December
Based on just three time periods, two buying and one selling, December has been pretty much defined. Overall, the market is up about 820 points since late November1991. By limiting trades to just the three opportunities given above, it has produced over 400 points in movement since 1991.
Clearly, the reasoning that is usually given for the "December Effect" does not explain why the second week of the month is so bearish. If December was the only month to show these kind of consistent tendencies, I might be a little more inclined to fall in line and say that the consideration of capital gains taxes are why the "December Effect" exists.
However, as I pointed out earlier, there is at least one month that is as bullish, if not more, than December. October has been higher 79% of the time since 1991 as well. However, the degree that the market has been higher is by 316 points, almost 1/3RD MORE than the month of December. Any tax benefits from that? (Oh, I know, there are probably funds buying at the beginning of the 4th quarter to make up losses that occurred from the summer months, or something that sounds good like that).
Then there is also Christmas. Why would the bullish run end just a couple of days after Christmas instead of going until the last day of the month, or at least the last couple of days? In fact, the market is slightly bearish on December 30th and 31st. Perhaps there is a good explanation, but that doesn't explain why the market is so bullish the first several days after July 4th as well.
Regardless of reasons, traders need to realize that there is solid evidence that seasonal influences in the stock market, and specifically the stock indexes, play a major role in price movement over the short-term. In this article alone, I have given four different trading periods and seasonals that have produced market movement almost equaling the total market movement from 1991 to the present. There may be questions as to why the market moves the way it moves in December and other times during the year, but you can't argue with the cold hard facts that the market HAS made these moves.
About the Author
Ryan Jones is considered one of the trading industries "most complete traders".
Starting his trading career at the early age of 16, he had traded nearly every major market and strategy by the age of 21. At the age of 26, Ryan signed a book deal with John Wiley making him one of the youngest authors ever in the field of futures trading. His book, The Trading Game, Playing by the Numbers to Make Millions is still considered to be the authority on the subject of trading and money management by many leading traders. Ryan's advanced experience and knowledge across many trading fields such as Technical Analysis, Option Trading, Money Management and the S&P have lead to several trading feats, including turning a $15,000 account into over $107,000 in less than 90-days short-term trading the S&P (real money).
For Our Fast Break Readers
Sign up for your complimentary month of "S&P Probability Analysis" emailed daily and we'll rush you the "S&P Day of Week" report today.
Looking at seasonal factors or pattern influences alone are both pretty amazing. But the real key is combining these two major influences. Each day Ryan Jones formulates his "S&P Probability Analysis" from seasonal factors that might influence market action AND current short-term patterns. For a limited time you can get this great analysis on a complimentary basis and we'll also send a complimentary "S&P Day of Week" report. Sign up today! http://partners.futuresource.com/offers/rjo_dayofweek.jsp
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