New Research About December Market Performance
December Tends To Be An Up Month, If
The Market Is Up The Preceding 11 Months
One of the things that
we are constantly driven to do at TradingMarkets is to publish original research
that can provide an edge for traders. And we believe that the most useful
information for traders is information that is quantified and statistically
backed.
The Phenomena
During the month of
November, the S&P 500 has broken to new highs. With the end of the month just a
few days away, we decided to ask this question:
Is there a directional bias for the month of
December when the S&P 500 is up for the year at the end of November?
We looked all of our
available data on the S&P 500 which goes back 42-years to 1963. Over that period
we counted the number number of years that were up through November and looked
at how strong December was in those instances.
The Results
Our findings are
interesting and potentially valuable to active traders and investors. There has
been a strong directional bias for December when the S&P 500 was up into the end
of November. Let’s break this apart and walk through process that led us to the
conclusion.
We found out that 27 of
the 42 years we tested were up through November. For those 27 years, 78% (21 out
27) of the Decembers wound up closing higher by December 31. And 2.01% was the
average gain for those up Decembers. Clearly, there would been an edge if you
bought stocks during Decembers that were preceded by a market that was higher
for the year at the of November. It’s good to keep in mind that, if you were
unaware of this research, your edge would have been diminished. The average gain
for all 42 Decembers during the entire test period was 1.54%. While there was an
upward bias for Decembers overall, the performance of Decembers in which the S&P
500 was up by the end of the November, was significantly better.
Summary and Conclusion
While we do not advise
that anyone trade on the basis of this information alone, this research from
TradingMarkets is valuable when it is combined with other trading strategies or
market indicators that you may already be using. During years in which the S&P
500 is higher by the end of November, you might consider increasing your
position size when you have a signal to go long on individual stocks or stock
indices. And for shorts, you might consider being for selective.
That said, let’s to a
quick look at this year.
In
mid-October the S&P 500 bottomed and has climbed steadily, establishing a new
closing high of 1248.27 on November 18. Since then it has continued strongly
higher. While the market could easily pullback at any time, the recent action
strongly suggests at the end of November, the S&P 500 will close for higher for
year. If that happens, then our research at TradingMarkets indicates that you
may have edge on the long side in December.
For years, traders have speculated
about whether there is a positive seasonal bias in December. Some of observed
that rallies tend to occur during the week between Christmas and New Years and
called it the “Santa Claus Rally” — but that is largely a subjective
observation. Now for the first time, a statistical edge for December has been
identified by TradingMarkets. During our 42-year test period, we looked at how
December performed when they were preceded by up markets through the end of
November. 78% those Decembers closed higher by the last trading day of the
month. While no one can predict if this edge will continue to work, we believe
that this finding may provide valuable to professional traders, money managers
and institutions for this coming month.