December and Seasonality

The only thing I know about seasonality is during an uptrend you buy low – sell high and then buy back even higher. In a downtrend you sell high - buy low and then sell even lower.

December more than any other month is loaded with seasonality folklore which is recycled annually in the business dailies. The books on seasonality are published every season and basically say the same thing as last season. The seasonality bible is the Stock Trader’s Almanac first published in 1967. This book allowed Mr. Hirsch to distil his lifelong interest in stock market history, cycles and patterns into a practical working tool for the average investor. It was the first compilation of the market’s seasonal trends and tendencies combined with a calendar and laid out for use by non-institutional investors.

One of the mid December seasonal plays is the “free lunch” wherein investors tend to get rid of their losing stocks near year-end for tax purposes. This often has the effect of driving the prices down to near 52-week lows. The Stock Trader's Almanac has shown that NYSE stocks selling at their lows on December 15 will usually outperform the markets through the following late January and early February. I assume the TSX would follow the same model.

Next is the Santa Clause rally which is a short advance within the last 6-days of December and into the first 2-days of January. The Almanac quote is “If Santa Claus should fail to call, Bears may come to Broad and Wall.”

Then we have the January Barometer which states that as January goes, so goes the year. The 2010 Almanac claims only 5 errors since 1950 for a 91% accuracy ratio.

Finally we have the January Effect which is the tendency of the small caps to out-perform the large caps through January as measured from the Russell 2000 vs. the Russell 1000 index. The Almanac post several reasons for this seasonal event.

I will likely post the same thing next year