Here’s what to expect this week
One of the questions traders ask at the end of the year is whether or not
it’s worth trading that final week between the Christmas and New Year’s holidays. My friend Doug Hirschhorn, who has begun a
trading blog, uses the example of Ted Williams to address this
question. When given the opportunity to pull himself out of the last game
of the year to preserve his .400 batting average, Williams refused–and then
preceded to improve on his average. He felt opportunity, and he went after it.
How much opportunity is there during the holiday week? Going back to
1990, we have had 63 trading days during these weeks. My trusty database
tells me that 57 out of those 63 days traded below the most recent 200-day
volume average–22% lower volume on average, to be specific. This is
important because volume correlates strongly with volatility–and that
correlates strongly with the opportunity that short-term traders are likely to
find in the market. A look at the data finds that 53 of the 63 days traded
with ranges smaller than the 200-day average: about 26% below average.
Interestingly, the holiday periods always seem to trade at a fraction of the
volatility and volume of the previous year, but it is not the same
fraction. Comparing years that have been high vs. low in 200-day volatility with
a median split, we find that holiday weeks trade, on average, 36% below normal
volatility during high volatility times and 18% below normal
volatility during low volatility periods. This means that the difference
between holiday trade and normal trade during low volatility periods such as the
current one is less than the difference during high volatility times.
Finally with respect to price change, we can see that, of the 63 holiday week
trading days, 39 were higher on the day and 24 lower for an average price change
of .15%.For the 1990-2004 sample overall, the average price change was
.04% (N = 3585; 1879 up, 1706 down). Holiday weeks, it would seem, have a
bit of a bullish bent. I notice, however, that this bullish tendency has
been greater during high volatility times than low volatility ones. During
high volatility periods, the average daily price change during holiday weeks has
been .20% (22 up, 10 down). At low volatility periods (such as the current
one), the average daily change has been .09% (17 up, 14 down).
So is there opportunity at the end of the year? In terms of market
movement, probably about 20% less than we’ve seen over the past 200 days.Â
In terms of directional change, no real bullish edge at this low volatility
juncture. Tempering expectations seems like the best trading strategy for
the week ahead.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.