History Says the S&P Can Bounce Into the New Year

The day before Christmas is typically bullish with low volatility

Senior Quantitative Analyst
Dec 19, 2018 at 8:00 AM
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Before the month started, I had an article showing the typical December returns over different time frames. The chart is below with the current December return. It completely distorts the axis but it's clear that things have not gone as expected. It's the worst start to December since 1931, which was early in the Great Depression.

Historically, the end of December has been a good time for stocks, as you can see in the typical returns in the chart below. This week, I'll look at whether the huge decline so far changes the numbers. Also, I'll drill down to see how stocks typically perform over the next two holiday weeks, Christmas and New Year's.

sp500 december returns since 1950

Are Stocks Poised for a Bounce?

Stocks have tended to bounce after awful returns through the first 18 days of December. When the month is down by 2% or more at this point, the rest of the month has been positive nearly 90% of the time, averaging a gain of 1.42%. I'm not sure how comforting that is, considering the S&P 500 is down about 8% so far this month, but it's better than expecting further losses.

dec 18chart2

Here are the individual returns for the worst Decembers, at this point, for the S&P 500 Index. The table below goes back to 1928. Notice the 2018 return is the second worst so far, sandwiched between two Great Depression years.

sp500 worst december returns


Holiday Weeks and Stock Performance

The next two weeks are shortened four-day weeks for traders, with markets closed next Tuesday, Dec. 25, for Christmas, and the following Tuesday, Jan. 1, for New Year's Day. These two weeks have generally been positive for stocks. The S&P 500, during the week of Christmas, averages a 0.51% return, with 66% of the returns positive. New Year's has been better, averaging a gain of 0.74%, with 68% of the returns positive. Both weeks outpace typical weekly returns going back to 1950.

dec 18 chart4

Finally, in the tables below, I drill down on how the S&P 500 has performed in the days surrounding the holidays. The day before and after Christmas have been quite bullish, with very low volatility. Based on that, you would consider buying the index this Friday and capturing the return on Monday and Wednesday before considering selling.

As far as the New Year's holiday goes, the first trading day of the year shows not even half of the days have been positive, but then the next day is quite bullish. I find that the most interesting data in the second table is the volatility jump once you hit the new year. The last two days of the year have significantly less volatility than usual -- but then the first two trading days of the new year show significantly more volatility.

dec 18 chart5


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