The days surrounding major year-end holidays such as Thanksgiving, Christmas and New Year’s Day typically deliver relatively low trading volume in the stock market. Traders tend to shift their attention away from the market and toward holiday travel, shopping and events.
However, for those traders that have the time and desire to trade stocks throughout the holiday season, there are several seasonal trading patterns that have historically provided opportunities for traders.
The pre-holiday effect is the idea that stocks perform relatively well on the last day ahead of a market holiday. The NYSE is closed on Thanksgiving Day, Christmas Day and New Year’s Day. Historically, the stock market tends to rise on the day prior to the market closure.
The underlying cause of this phenomenon is supposedly the idea that traders tend to buy on days that they are feeling good and sell on days they are feeling bad. Is there any better feeling that knowing a day off or a three-day weekend is coming?
According to Quantpedia, “Research shows that market return during pre-holiday days is often more than 10 times larger than the average return during normal trading days.”
While many traders will be focused on turkey and dressing this Thanksgiving, seasonal stock traders will be more concerned with another type of dressing: window dressing. Many funds and money managers must issue periodic performance reviews for investors. It’s common for these reviews to come at year’s end.
Regardless of the types of returns a fund manager has produced throughout the year, some managers choose to produce the illusion of strong performance by buying shares of top-performing stocks just before the close of the year or the quarter. The idea is that investors who haven’t been paying close attention will give the stocks a once-over, see that they have been performing well and then credit the manager.
Fund managers looking for some window dressing could be big buyers of top-performing stocks at year’s end, driving up share prices even further.
In 2016, the three top-performing stocks in the entire S&P 500 have been NVIDIA Corporation (NASDAQ: NVDA), ONEOK, Inc. (NYSE: OKE) and Freeport-McMoRan Inc (NYSE: FCX).
While fund managers are dressing the windows with top performers, other traders are looking to cash in on the potential tax benefits of some of the worst market performers. In order to deduct losses from capital gains for the year, traders must sell a losing stock before the closing bell on December 31. Traders use the opportunity to cut ties with some of their most disappointing investments. As a result, these under-performing stocks often get one last stomp right before the end of the year.
In 2016, the three worst-performing stocks in the S&P 500 have been Intercontinental Exchange Inc (NYSE: ICE), Endo International plc – Ordinary Shares (NASDAQ: ENDP) and First Solar, Inc. (NASDAQ: FSLR).
Disclosure: the author holds no position in the stocks mentioned.
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