Daily Commentary - Posted on Saturday, January 1, 2011, 2:38 PM GMT +1
Implications of 2010 Year-End Returns
First of all a Happy New Year, good luck and successful trading in 2011 to all of you.
Just recently Rennie Yang from MarketTells (highly recommended, and hats off) presented a very interesting and telling study concerning the positive short-term (1-week time frame, spanning the first 5 sessions of the then following month) implications in the event the S&P 500 wrote better than a 5.0% monthly gain in the past, representing a significantly better than random chance for closing at a higher level five sessions later.
Due to the fact that I’ve received a couple of requests to show what regularly happened during the first five sessions of the year in the past, and the SPY (S&P 500 SPDR) gained +6.68% in December, I checked for those occurrences where the SPY (S&P 500 SPDR) closed out a month with a better than +6.50% gain in the past.
Table I below shows all respective occurrences and the SPY (S&P 500 SPDR)′s historical performance (since 01/01/1990) over the course of the then following 1 to 5 sessions (and the minimum number of sessions – if any – until the index posted a first higher close above the trigger day’s close), assumed one went long on close of the last session of a month where the SPY (S&P 500 SPDR) had closed out a month with a better than +6.50% monthly gain in the past.
When the SPY (S&P 500 SPDR) closed out a month with a better than +6.50% monthly gain in the past, the SPY (S&P 500 SPDR)
- … posted a 1.0%+ gain on 6 out of 19 occurrences, but never lost more than -0.60% on the first session of the then following month ;
- … posted at least one higher close above the trigger day’s close over the course of the then following five sessions on all of the last 19 occurrences ;
- … never looked back and did not post a single close below the previous end-of-month close during the first five sessions of the then following month on 9 out of 19 occurrences ;
- … closed at a higher level five sessions later on 17 out of those 19 occurrences (or 89.47% of the time), with a median gain of +1.61% (in comparison to an at-any-time median weekly return of +0.31%) ; and
- … was trading higher 1.0%+ 3 and 5 sessions later on 12 occurrences, but lower -1.0%+ on only 2 occurrences.
Despite the fact that the S&P 500 is up +0.07% on the last week of the year, up +6.53% on December, up 10.20% on the 4th quarter, up 22.02% on the last 6 months (semiannually) and up 12.78% on the year, the S&P 500 ended an otherwise positive year on a negative note, closing lower on the last two sessions of the year. Unfortunately (concerning it’s statistically significance) the latter is quite a rare occurrence (2010 marks the 9th occurrence since 1900), but – from a historical point of view – shows some extraordinary bullish implications over the course of the first month of the then following year.
Table II below shows all occurrences and the S&P 500′s historical performance (since 01/01/1930) over the course of the then following 2 , 5 (1 week), 10 (2 weeks), 15 (3 weeks) and 21 (1 month) sessions (and the minimum number of sessions – if any – until the index posted a first higher close above the trigger day’s close), assumed one went long on close of the last session of a year where the S&P 500 had closed lower on the last two sessions of the year in the past.
When the S&P 500 had closed lower on the last two sessions of the year in the past, the S&P 500
- … closed at a higher level 2 sessions, 2 weeks , 3 weeks as well as 1 month later on all of those 8 occurrences ;
- … posted a 1.0%+ gain 2 sessions, 2 weeks , 3 weeks and 1 month later on 4 up to all 8 occurrences (1 month later), but never closed lower less than -1.40% (not shown) below the previous end-of-year close on any of January’s sessions (maximum drawdown) ;
- … never looked back and did not post a single close below the previous end-of-year close during January on 4 out of 8 occurrences ; and
- … the setup’s median weekly (5 sessions) and monthly (21 sessions) gain of +2.94% and +4.20% significantly surpasses the respective at-any-time weekly and monthly returns of +0.31% and 1.11%.
By closing out the month with a better than +6.5% gain, and ending the year on a negative note (two consecutive lower closes on the final two sessions of a year), and on top of other positive seasonalities like entering into the to 3rd year of the Presidential cycle ( see The Third Year of the Presidential Cycle ), probabilities and odds are tilt in favor of an at least short- and intermediate-term continuation of the recent uptrend in the markets.
Disclosure: No position in the securities mentioned in this post at time of writing.
Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).
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