Dubai: Rather than start with the New Year holiday, history shows that it is best to begin investing with the last holiday of the previous year: Christmas.
Historically, thanks to the popular ‘Santa Claus Rally’ (the seven-trading-day period beginning after Christmas), the days before and after Christmas and New Year’s Day have been shown to be best for stock trading, especially technological stocks and smaller company stocks.
For example, in the US, the Nasdaq benchmark for tech stocks and the Russell 2000 small-stocks index have averaged gains of 3.1 per cent and 2.4 per cent from three days before Christmas to three days after New Year’s Day since 1990. Most European, Asian, Middle East benchmarks are known to record similar gains as well, largely mirroring their US counterpart.
Moreover, these days fall in what is widely considered the ‘best six months’ of the year and right in the middle of the ‘best consecutive three-month’ span (November, December, January), as per historical analysis of months in a year that are ideal for investment gains.
What is the holiday effect in stock trading?
The stock market is subject to a seasonal effect in that at certain times of the year, month or even week, share prices can rise or fall. The holiday effect in stocks is simply following the days before and after a market holiday.
There are different reasons why stocks may be up or down consistently before certain holidays and some of the historical data looks like it might provide a consistent cue.
This can be because there are fewer traders active in the market, like over the peak summer or mid-year holiday months, or more traders in the market (for example, as companies’ financial years come to an end). This will also affect how volatile share prices are.
It can also be because traders have simply come to expect rises or dips at these times and the expectation becomes ‘self-fulfilling’, playing into the factual reality of trading along with the momentum. Many traders now rely on technical analysis – using charts to identify historical patterns in the price of an asset – so tend to sell or buy at the same time as a result.
Should you trade the holiday effect in stocks?
While some experts recommend limited trading, some say an approach of taking a short trading position (a trading technique in which an investor sells a security with plans to buy it later) and holding for the holidays makes more sense. Most investors are much better off just using a stress-free investing approach of buy-and-hold.
It is important to remember, however, that seasonal stock trends do not apply all the time and should only be one factor in your trading strategy. Share prices often rally ahead of long weekends and three-day holidays. This has been attributed to simple optimism among traders.
There is also a more fundamental basis, however, as consumers tend to spend more over holidays, especially ones like Christmas. This can push up the share prices of retailers in particular.
What stocks do well during Christmas?
Stocks that perform well during the holiday season range from major retailers to online retailers like Amazon. The day after Thanksgiving, also known as Black Friday, can be a good indicator of how retail stocks will perform.
Less bullishness (positive momentum to push markets high) on last day before Christmas can be the result of last-minute portfolio restructuring. Pushing gains and losses into the next year often affects the New Year’s first trading day. Recently this selling pressure has continued into the New Year.
While looking at the historical data on the holiday effect, remember that outside events and news can always throw the patterns. The business cycle will also affect stock returns and is a much easier way to change your investing strategy.
Verdict: What investments will rise and fall this Christmas?
Stocks are typically up before the holiday and fall immediately after. Establishing a short position into strength on the Friday before this three-day weekend may have the best odds of a profitable outcome in the following week.
Bonds and other fixed-income investments are usually much less volatile around holidays and provide great protection against the uncertainty. Everyone should have some bond investments in their portfolio for when stocks play roller-coaster.
There have been a few other occasions in history in which the market rose by as much as it has since the March low, when the health crisis peaked, and following some of them the bull market continued a lot longer and rose a lot higher. So, although trends predict a higher market move in the years to come, there is reason for caution to those looking for short-term gains.
National Consumer Day today, know what your rights are
While stock investors got the big bull market they wished for this Christmas, they are advised to be careful as well when investing larger amounts for the longer term, as there are now increasing number of warnings from trend watchers and veteran investors that stock markets are now reaching its maximum potential to rise further.
