As the year turns
12/21/18

●Market closures, end-of-year tax issues create unique market environment

●End-of-year pattern has shifted in recent decades


 

It’s rally time!

Right?

The most popular perception of what happens around this time of the year is probably the “New Year’s rally,” which is the tendency for the stock market to start January with an up move—exactly what it did last year, when eight of the first nine trading days of 2018 were up. That type of price action may have been more typical a generation or more ago, but for the past 30 years, at least, it looks more like the exception than the rule.

The following chart shows the S&P 500’s (SPX) returns for the final five trading days of one year and the first five of the next, since 1988-1989. The top half of the chart shows each day’s median gain or loss, and the bottom shows the percentage of times each day closed higher:

S&P 500 (SPX) median returns, 1988–1989 to 2017–2018

Source: Power E*TRADE


The most notable one-day pattern has probably been the tendency for the last day of December to close lower: It’s been a down day 20 out of the past 30 years (including last year), with a -0.42% median return—weakness that is often attributed to traders wanting to liquidate certain open positions by the end of the year to simplify their taxes. Also, the fourth day before New Year’s Day (Wednesday, December 26 this year) closed up in 21 of 26 years (70% of the time).

The bigger lesson is that the first five days of the new year haven’t exactly been gangbusters. Only one of them—day 2, the most bullish—closed higher more than 50% of the time. Days 1, 3, and 4 actually had negative median returns, and none of these three days closed up more than half of the time.

So pay attention to the issues that are driving the market as 2018 transitions into 2019. The market doesn’t just automatically rally—or sell off—just because the calendar hits a certain date.

Today’s numbers (all times ET): Quadruple Witching expiration, Durable Goods Orders (8:30 a.m.), GDP (8:30 a.m.), Corporate Profits (8:30 a.m.), Personal Income and Outlays (10 a.m.), Consumer Sentiment (10 a.m.).

 

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