Tharp's Thoughts Weekly Newsletter
The Santa Clause Rally – Does it Work? by D.R. Barton, Jr.
Discounts Expire Soon on January Workshops (Held Only Once Each Year in the U.S.)
Tip: Discipline in Keeping Your New Year's Resolutions, By Van Tharp
Happy New Year!
The Santa Clause Rally – Does it Work?
“If Santa Claus should fail to call,
Bears may come to Broad & Wall”
—Old Wall Street Saying, unattributed
The S&P 500 (and the other broad U.S. indexes) are pushing into the end of the year trying to conclude another double digit annual gain. With two trading days remaining (this was written Monday night), the S&P is up 13%.
And one year-end seasonal trading tendency suggests the market should hold onto or even add to those gains.
Hirsch and Hirsch in their ubiquitous Stock Trader’s Almanac, propose the Santa Clause indicator (and provide us with the quote above) to help answer why the end of the year trading has a directional tendency.
The Santa Clause indicator is pretty simple. It looks at market performance over a seven day trading period – the last 5 trading days of the current trading year and the first two trading days of the New Year.
These type of short term indicators can have serious shortcomings as I have written about in the past, see my dissection of the “First Five Days” indicator here http://www.iitm.com/Weekly_update/Weekly_407_Jan_21_2009.htm#tradingtip and here http://www.vantharp.com/Tharps-Thoughts/664_Jan_15_2014.html ) for example.
However, the Santa Clause Rally indicator actually has some statistical and fundamental merit.
Santa Clause by the Numbers
If we look at this period of the last 5 trading days of current year plus the first two trading days of the New Year, we find some compelling stats.
Since 1969, that time frame has returned positive results in 34 out of 44 years for a 77% win rate. The average gain over that time period is 1.6%.
As with any seasonal tendency, I take a look at the fundamentals behind the data. In this case, we have one strong investor psychology reason for a move up and a very tangible institutional money reality supporting the trend as well.
On the psychology side – this is a time period where investors and traders are certainly influenced by the mood of the season. Whether you celebrate Christmas or not, it is undeniably the U.S.’s most permeating holiday with a well-promoted theme of joy and good cheer. It is followed up one week later by New Year’s Eve / day – a near universal celebration in the western world. Spirits are high and optimism is certainly the mood of both of these holidays.
The Institutional End of Quarter/Year Activities
On the institutional side, there is a well-known phenomenon of trading to make portfolio returns look better with techniques that fall under the broad term of “window dressing.” This can range from things that are fairly benign like adding hot stocks to the portfolio so that it looks like the manager was in them all along, to more controversial practices like bidding up stocks that are already in the portfolio. Here’s some interesting research on the subject reported by Jason Zweig:
“A Wall Street Journal analysis of daily trading in roughly 10,000 stocks since 2004 found that on the final trading day of each quarter, there was a sharp increase in the number of stocks that beat the market by at least five percentage points, then trailed it by three points or more the next trading day.”
While this practice takes place mostly in more thinly traded stocks, the general yearning for stronger results at the end of the quarter and especially at the end of the year certainly adds to the consistency of the Santa Clause rally.
And there is also the reality that institutions and funds have new money coming into them during the first couple of days of the quarter and of the New Year. Automatically funded accounts like pension funds or any systematically invested money has to be put to work. This well-known money flow effect caused the first two days of the month and quarter to be better performers on average, than any other two day period.
So putting the fundamentals and the statistics together, the Santa Clause Rally does seem to have validity and should be taken into consideration as an input (but not the only input!) into your investing and trading decisions.
I hope that all the hope, love and joy of this season are with your and families! And may you have a happy and prosperous New Year!
Your thoughts and comments are always welcome—please send them to drbarton “at” vantharp.com
Are You Ready to Take Your Trading to the Next Level?
In a few weeks, we will be presenting two of our Foundation Workshops at our offices in Cary, NC. Van calls these "Foundation" workshops because they provide essential material that you must master to become a great trader.
Hurry, early enrollment discounts expire soon and seating is limited!
The Blueprint for Trading Success workshop is a complete structured program that will launch you into a more advanced skill level in your trading. You’ll learn seventeen focused, strategic steps that will help you create the kind of trading results you want. We regularly hear from students that they know planning is important but they’re not sure where to start and in some cases, they don’t even know what a trading business plan should look like. Hint – it should not look like a “typical“ business plan. You’ll leave this workshop with a template in hand to guide your trading business’s development and your personal growth as a trader.
In the How to Develop a Winning Trading System workshop, we'll teach you one of the real secrets of long-term trading success — how to design or modify trading systems so they fit your beliefs, personality, and resources. Learn all of the building blocks and processes for putting them together into robust systems that can trade stocks, futures, currencies, or options. The objective is to develop a system that specifically fits you, whether you want to make 50 trades per year or 50 trades per day.
By the end of this workshop, you will be thoroughly prepared to develop systems that allow you to easily adjust to changes in the markets, or in your personal circumstances.
To register or to see our full workshop schedule, click here.
Combo Discounts available for all back-to-back workshops!
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Discipline in Keeping Your New Years’ Resolutions
Here are several ideas (reprinted from a past update) that may help you to continue your New Year's resolutions throughout the entire year.
1) Divide a General Resolution into Specific Steps.
Whatever your resolution may be, you can divide it into specific steps. It’s much easier to accomplish small steps that you can imagine doing for the rest of the year (or the rest of your life) than it is to fulfill a giant goal that would be huge. Start with something that is easy and make sure you can accomplish it.
Thus, a resolution to make 50% this year in your account could be broken into a number of steps such as (a) look at ideas that might help improve your trading; (b) test each idea and see how much improvement you will get from each one; (c) implement the best idea following the ten tasks of trading. In fact, your resolution might simply be to follow the ten tasks of trading each day and notice what that means for you.
2) Make Promises to Yourself and Include the Reason for the Promise in the Resolution.
Suppose your promise to yourself is to do a daily mental rehearsal. The way you might phrase that is to promise yourself to do a daily mental rehearsal in order to plan ways to increase your discipline. The second statement is much easier for you to follow- through with on a regular basis. Also make sure that the promise you set is something you want to do and not something someone else wants you to do. If I tell you that you must do a daily mental rehearsal, you are not likely to do it. On the other hand, if you decide how important this kind of rehearsal will be for your well being and your trading, you are much more likely to do it.
3) Determine Your Triggers.
If you are setting a resolution, it is probably because you want to do something that you have not been able to do. There is probably a reason for your inability to do it — certain triggers that set you off. What are those triggers? Are there environmental triggers, such as the presence of certain people or certain conditions? Are there certain internal feelings that set you off? What are those feelings and when do they occur?
Once you determine what your triggers are, you are much more prepared for them. I strongly recommend doing extensive mental rehearsal around the issue of dealing with those triggers. Use the mental state exercises in Book Four of the Peak Performance home study course and rehearse dealing with those triggers so that you have more discipline in situations in which you will need it. Awareness is a big part of keeping your resolutions.
4) Look at the Positive Side of Your New Resolution.
When we get into the act of keeping our resolutions, we sometimes feel as if we are denying ourselves. Instead, look at the positive side of what we are accomplishing. Turn on something positive. For example, if you are trying to stop smoking, whenever you get the urge to smoke exercise, or take a walk, . Concentrate on the joy of the new behavior instead of the negative that you are trying to overcome. You’ll find that moving forward is much easier.
5) Keep a Diary of Whatever It is You Are Working On.
A lot of what I’ve suggested for you involves mental awareness. Most people are unaware of the big picture that’s involved in accomplishing some goal. However, when you keep a diary that lists your accomplishments and your thoughts, you’ll find it much easier to understand what is going on inside of you.
Listing your accomplishments is also a form of reward. When you start focusing on your accomplishments — especially if you’ve followed step one and have set small steps toward your total goal — you’ll feel great about what you achieved and where you are going.
6) Make It Okay to Give In Occasionally.
If you are attempting to make a major change, you may have occasional setbacks. If you view that setback as failure, then the resolution is over. You can give yourself a bad name. On the other hand, if you make it okay to have occasional setbacks, then you can keep going — it’s just a setback.
Realize that your setback is an opportunity to learn something about yourself. What happened? What were your thoughts? Write down all of that information in your diary and determine what you can learn from that. You might discover a new trigger and then you can plan for how to get around those triggers. In any case, forgive yourself for the setback and then move on.
Quite often setbacks are due to inadequate preparation. Perhaps you didn’t do enough research with respect to your trading. Perhaps more mental rehearsal was needed. Perhaps you discovered something about your thought process that you didn’t expect, but can now use in your preparation. What additional preparation can you do to make sure that you move ahead toward generally keeping your resolution?
7) Reward Yourself Throughout the Process.
You need to acknowledge accomplishments early in the process. The first few days will probably be the hardest. Consequently, when you get through those days and accomplish your goals, find a reward. Make the process fun through a system of rewards.
Van K. Tharp, Ph.D.
P.S. We'll be back next week with the monthly Market Update on market condition. Have a happy New Year and see you in 2015!
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