Thanksgiving Trade

I am a bit late posting about the Thanksgiving trade which buys the market the week prior to Thanksgiving and exits the market in the third week of January. (This may have been fortuitous as entering on November 19 would currently put the trade 2.5% under water.)

Over the last 20 years, the trade has been a winner 80% of the time with an average return of 2.6% per trade. The standard deviation was 4% and the win/loss ratio was 1.5. A chart of the equity curve and a bar chart of the return for each of the last 20 years is included above. The method has been reliable with only small losers with the notable exception of 2007 where the trade lost 7.2%. 2003 was a recent big winner returning 9.1%. In light of the devastating market plunge the past two months, can we dare to hope for a year end rally?

The Thanksgiving Trade

The 'Thanksgiving Trade' has been quite reliable over the years. The trade buys prior to Thanksgiving and sells the third week of January. Over the 19 year history of the SPY, the trade has been a winner 84% of the time with an average return of 3%. The equity curve for the trade and a bar chart of the return for each year is included above.

Will the trade produce a cornucopia of profits this year or will it prove to be a loser like in 2001 and 2002? Even when the trade has been a loser, the losses have been small resulting in a win/loss ratio of 3.5.

January Effect

January is fast approaching which brings up the question of whether the 'January Effect' exists in recent market history. Do the small capitalization stocks outperform large capitalization stocks during January?

In the last 16 years, the Russell-2000 has been up 81% of the time during January returning an average of 2.5%. The three losing years were 2002, 2003, and 2005. The SP-500, in the last 16 years, has only been up 69% of the time in January and returned an average of 1.2%. The five losing years were 1992, 2000, 2002, 2003, and 2005. The equity curves are shown above.

Can we conclude anything from the above? The results for Russell-2000 vs. SP-500 are not statistically significant. As you can see from the bar chart above, the difference between RUT-X returns and SP-500 returns has not been consistently positive. Examining additional data may show the difference to be significant, but recent history does not seem to show a small capitalization bias.

The results could very well be much different if I had tested with a micro-cap index instead of the small-cap Russell-2000 index. I do not not enough micro-cap data to do any testing. I will have to attempt to find a micro-cap vs. large-cap study for recent years.

Best Day of the Month

Since the bottom in 2003, the 1st trade day has been the best day of the month for SPY. The 23rd trade day of the month has been nearly as good. The 11th trade day of the month tends to quite good as well.

The strength early and late in the month is certainly something that can be exploited for a short term trade. Examination of market circumstances near the end of the month and this seasonal bias may yield a a reliable trade that can be added to your arsenal.

The table below shows the results for each trade day of the month. Note that the Nth trade day of the month is the Nth day on which trading occurred during the month. Also note that the 20th through 23rd trade day of the month do not occur in every month.

Best Day of Week

Seasonality is a factor that can help us to establish advantageous times to enter trades. For example, if we know that Friday tends to be the weakest day of the week we might have a bias to buy on Friday.

Since the bottom in 2003, Friday has indeed been the weakest day of the week for SPY. The SPY has done much better during the first half of the week with Wednesday being the best day. While the average gains are not large enough to justify a trade by themselves, they are useful as an additional tool for trade timing. The figures for each day on a close-to-close basis are listed in the table below.