Daily Commentary - Posted on Friday, December 3, 2010, 9:23 AM GMT +1

5 Comments


Dec Friday 3

Looking Forward to a Strong December

December started with a bang. The S&P 500 gapped up +2.16% on the first session of the month, immediately followed by another strong up-day (S&P 500 +1.28%) for the markets, compliant to positive seasonalities like the turn-of-the-month effect (the last 2, but especially the first 3 sessions of a month) and the first week of December (see Seasonalities: The Market’s Performance in December), among others.

After Thursday’s strong gains it seems less likely that the market will follow historical occurrences, consolidating a huge unfilled gap up (gt. +0.75%) and closing lower 3 sessions later (see Unfilled Gap Up and Consolidating , means a low likelihood that the SPY will close below Wednesday’s close on Monday, December 6).

Historically, two strong up days right at the start of a month had significantly positive implications looking at the respective monthly performance.

Table I below shows the date of the last session of the month (‘End-of-Month Day‘), the S&P 500′s historical (since 1930) performance (‘Monthly Returns‘), the respective number of sessions, the maximum gain and the maximum loss (drawdown) during the month (assumed one went long on the last session of the previous month), and the respective monthly performance for the previous (‘Prev. Month‘) and the then following month (‘Next Month‘) on those occurrences (month) where the S&P 500 closed higher at least +1.0% on a back-to-back session right at the start of a month in the past (means up at least +1.0% on the first and the second session of a month).


(* no close below trigger day’s close during period under review)

Table II below shows the respective weekly (for the respective month traded) and monthly key performance figures like the number of weeks / month traded, the percentage of positive weeks / month, the median weekly / monthy return, … and the maximum gain and loss for the respective weeks / month traded.

It is interesting to note that

  • … the S&P 500 closed out the month with a gain on 23 out of 26 occurrences (or 88.46% of the time), thereof the last 13 ;
  • … the median monthly gain of +5.62% significantly surpassed the S&P 500’s at-any-time monthly performance of +0.88% ;
  • … the median weekly gain of +1.17% significantly surpassed the S&P 500’s at-any-time weekly performance of +0.28% ; and
  • … the S&P 500 never looked back and did not post a single close below the previous end-of-month close (‘max. loss‘ is positive) on 18 out of 26 occurrences (or 69.23% of the time).
  • … (and it is the first occurrence for a December)

Conclusions:

From a statistical and historical point of view, after posting two strong up-days right at the start of the month probabilities (winning percentage) and odds (expectancy) are heavily tilt in favor of a positive monthly performance in December, and additionally there is a significantly above-average probability that November’s end-of-month close (S&P 500 at 1180.55) will not be penetrated during the recent month. Any short-term consolidation of recent gains might provide a buying opportunity targeting higher prices during the remainder and / or at the end of December.

Successful trading,

Frank

Disclosure: No position in the securities mentioned in this post at time of writing.

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Disclaimer

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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Comments (5)

 

  1. […] This post was mentioned on Twitter by Frank Hogelucht and Trader Club Tirol, Quant Blogs. Quant Blogs said: Trading the Odds: Looking Forward to a Strong December http://bit.ly/i2yoMd […]

  2. Denali92 says:

    there is a significantly above-average probability that November’s end-of-month close (S&P 500 at 1180.55)

    -That is a rather STUNNING conclusion, bit it may be warranted, which is quite unbelievable. I must admit I have expected a correction of the monthlies this month, particularly IWM and MDY, as they appear quite over-extended, but now that I see the very helpful table above… it does appear that there is a higher than average probability for a significant correction in either January or most probably February of 2011, which makes a lot of sense to me.

    Bottom line, I guess, is stay bullish, but do not be stubbornly bullish in 2011 if / when a significant decline starts.

    Very interesting!

    THANKS!

  3. DrBohica says:

    Appreciate the analysis regarding the price action itself, but does it not bother you that all the usual sentiment indicators are either highly or extremely bullish?

  4. DrBohica says:

    Thanks for your thoughtful assessment. Over the past couple of years, I’ve yet to see the market continue to meaningfully climb with such a high number of call-buyers (ISEE equity-only calls/puts) and with AAII sentiment showing such exuberance. I’d be curious to know why or when you feel it is best to ignore these indicators. Admittedly, sentiment is a difficult animal to pin-down, but retail investors seem quite comfortable with risk, as shown by these two indicators.

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