It’s not uncommon for the stock market to experience seasonal ups and downs. After all, the holidays can be a hectic time for a variety of reasons, and the stock market is no exception.
For example, you may have noticed some increased volatility over the Thanksgiving holiday timeframe. This is due, in part, because the stock market is closed on Thanksgiving and for part of Black Friday. It’s also partially caused by the fact that Thanksgiving weekend is a popular shopping holiday, and an increase in sales typically results in increased stock prices.
If all of this is making you wonder how the end-of-year holidays affect trading – never fear! Day Trader Architects is here to help you become a better trader by understanding how and why the stock market is affected by the holidays.
Holiday Trading Volume
In general, the amount of trading that occurs over the holiday season is lower than normal when compared to the rest of the year. People just aren’t trading stocks as much during this time, either because they are out of town, spending more time with friends and family, or simply just too busy with the holiday festivities. That said, trading isn’t non-existent during December by any means.
In fact, it’s actually a pretty good time of year to do some extra trading, if only for the fact that other traders may be slacking off. Lower trading volume translates to lower liquidity which, in some senses, makes it harder to trade. But, if you know what you’re doing, the holidays can be a great time for traders to put their heads down and make a little extra income to offset holiday expenses.
Holiday Stock Market Trends
Sales certainly affect the stock market’s holiday moves, but things like consumer sentiment, politics, and interest rates can as well. Historically speaking, the combination of all these factors has resulted in several holiday trading trends that repeat themselves.
The Pre-Holiday Effect
Year after year, stock exchanges around the world experience what is known as the Pre-Holiday Effect. Just as its name implies, this trend is marked by a distinct uptick in stock prices on the day before a holiday. A study by Robert A. Ariel that was published in The Journal of Finance shows that returns average between 9 to 14 times higher on the day immediately preceding a stock market holiday.
Regarding why the Pre-Holiday Effect occurs, nobody is quite sure. Some theorize that it’s caused by a general sense of happiness and optimism around the holidays, while others attribute the Pre-Holiday Effect to the overall decrease in liquidity.
The End of Year Effect
This trend is the same as the “end of quarter” trend, except on a larger scale. Just as they do quarterly, many portfolio managers will rebalance portfolios at the end of the year in order to stay close to their target ratio. This can lead to increased trading on New Year’s Eve which, when paired with the Pre-Holiday Effect, can lead to huge gains.
The January Effect
As the new year starts and everyone is feeling fresh and recharged from the holiday break, the stock market tends to perform favorably. It’s also the beginning of a new quarter, so investors have more wiggle room in terms of capital they can and will invest.
Historically speaking, the year the stock market is predicted to have depends on how January goes. That is to say, a volatile January is an indicator that the rest of the year will be volatile, a January with steady rising prices indicates a year filled with gains, and so on.
Holiday Stock Market Strategy
The approach you take to trading around the end of the year really depends on what kind of trader you are. Short-term traders often find it favorable to purchase their shares a day or two before Christmas and offload them immediately afterward. Long-term traders also typically purchase a couple of days before Christmas but typically wait until after the new year to sell.
The reason this works is because some traders will sell their stocks right before Christmas in order to mitigate any risks that may come in the form of post-Christmas company announcements. This bulk selling of stocks drives prices down, making pre-Christmastime a great time to buy.
It’s not too late to up your trading game this holiday season. Day Trader Architects offers trading courses designed to help you improve your strategy, build your confidence, and make you a more educated trader. Courses range from just $39.99/month to $149.99/month depending on your needs and budget. Plus, it’s easy to sign up. All you have to do is click here to register and we’ll start helping you right away.