So many trends get packed into the last three months of the year–and you shouldn’t forget about any of them when it comes to buying and selling. (You’ll find lots of information on these and other calendar trends in the Stock Trader’s Almanac by Jeffrey and Yale Hirsch (stocktradersalmanac.com)
First, there’s the trend we’re living through right now–when the October 31 end of the fiscal year for mutual funds, portfolio window dressing (sell losers and buying winners) and the early stages of end of the year tax-loss-selling combine to produce maximum volatility and consistent downward pressure on small cap stocks. It’s not an anomaly that the small cap iShares Russell 2000 ETF (IWM) was down 15.6% from its August 31, 2018 high after yesterday’s sell off.
Second, while November doesn’t mean the end of the annual running of the bears–as portfolio managers look to sell off the stuff that is down for the year so it won’t show up in end of the year annual reports, and as portfolio managers and individual investors look to sell off losing stocks in order to reap tax losses and tax benefits, November does, on average, mark the lows for the end of the year market. When I was at MSN Money my colleague Jon Markman calculated that buying around November 20 caught the bottom and the turn in the market in most years. Jeffrey Hirsch in the Stock Trader’s Almanac notes that November marks the beginning of the best six months of the year for stocks (with May through October marking the worst six months and adds that November is also the beginning of the best three months of the year for NASDAQ stocks. His recommended “best time” to buy for depressed stocks, especially technology and small cap stocks is the end of October.
The January effect kicks in during December actually. This period shows, according to Hirsch’s number crunching, decided outperformance by small cap stocks that runs into February. Over the years from 1987 to 2016, the small cap Russell 2000 has gained an average of 5.2% from December 15 through February 15. Small cap outperformance has strengthened, Hirsch writes in the Almanac, since the 1987 stock market crash.
And the year ends, in most years, with the Santa Claus ally, during the last five days of December and the first two days of January. The average gain during this period has been 1.4% since 1969. Of course, do remember that a failure of the Santa rally has often preceded bear markets. The Wall Street saying goes, “If Santa Claus should fail to call, Bears may come to Broad and Wall.” In 1999 the period showed a 4% loss that then turned into the 33-month 37.8% bear market drop that began on January 14, 2000.
