Out with the old, in with the new

The first trading days of the New Year are usually thought of in terms of their bullish potential—starting off the New Year on the right foot (or hoof…because bulls) with energetic buying. But champagne hangovers can sometimes prove lethal, so when’s the last time you actually took a close look at what the market did in those first few days of January? And while we’re at it, what about the week between Christmas and New Year’s?

In both cases there are some interesting historical tendencies to be aware of—and they don’t necessarily conform to popular notions about “holiday” rallies.

Take a look at the S&P 500 index’s (SPX) returns for each of the five trading days before and after the New Year’s Day market holiday between 1993 and 2017. The top half of the chart shows the S&P’s average (red) and median (blue) close-to-close price changes, while the bottom half shows the percentage of times each day closed higher or lower.

S&P 500 (SPX) daily returns, 1993 – 2017

Source: OptionsHouse

Two things jump out: The negative return on the day before New Year’s Day—that is, the last trading day of the prior year—and the sort of flabby performance in the first five days after the holiday. Isn’t that supposed to be the rip-roaring bullish kick-off to the New Year? Not so much, aside from the solid performance on day 2. But wait…

Twenty-five years really isn’t a very long time when you’re considering something that occurs only once annually. Let’s take a look at what the S&P 500 did in the preceding 29 years, from 1964-1992:

S&P 500 (SPX) daily returns, 1964 – 1992

Source: E*TRADE (data)

Here, the last day of the trading year was one of the most bullish, closing higher nearly 76% of the time. But the mixed-to-bearish tendencies on day 4 and day 5 after New Year’s Day are still apparent. That’s been the most consistent tendency over the past 54 years.1

The lesson: Patterns can shift over time. Since 1993 years, the S&P has shown a greater tendency to close lower on the last day of the trading year—in fact, it’s closed down in 18 of the past 25 years, including the last three in a row.

That’s quite a trend, but lest old chart patterns be forgot and never brought to mind, there’s been only one run (since 1964) of consecutive lower closes on the last trading day of the year that has been longer than three—the four years from 2005-2008.

And what about January as a whole? Well, we must pay our respects to the “January Effect”—the pattern of January indicating the market’s strength or weakness for the entire year. Yes, from 1960 through this year, the S&P 500’s January move (up or down) has correctly “predicted” the move for the entire year 42 out of 58 times (72%)—not too shabby a batting average. But since 1993, it’s worked only 64% of the time, and in the past 10 years it’s been a coin toss—five right and five wrong.

So as you’re getting into gear for the new trading year, forget about the January Effect, or who wins the Super Bowl, or whether Punxsutawney Phil sees his shadow. Focus on what’s driving the market now, and whether it’s following or diverging from historical norms.


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