The six trading days after Christmas enjoy stronger seasonal tailwinds than any other six-day period of the calendar.
So pay close attention if youâ€™re tempted to trade according to seasonal patterns.
This six-day period â€” specifically, from the first trading day after Christmas through the second trading day of the New Year â€” represents the confluence of several seasonal patterns that researchers have documented:
The accompanying chart, above, plots the odds, based on the Dow Jones Industrial Average since its creation in 1896. During this period, on average, the Dow has risen 76.6% of the time. Across all other six-trading-day periods since 1896, the Dow has gained 55.7% of the time.
Furthermore, as the chart also reveals, these improved odds prevail regardless of whether the stock market has performed well for the month to date through Christmas, or the year to date.
Furthermore, though the accompanying chart doesnâ€™t plot these additional data points, the improved odds of rallying are also impervious to whether the economy is in a recession (defined by the NBER) or the level of prevailing interest rates.
Confidence that those improved odds are genuine grows even more when we segment the historical data into recent and older periods. Since 1960, for example, the Dow has rallied 76.7% of the time over the period between Christmas and the second trading day of January. That compares to 76.6% for the pre-1960 period. Thatâ€™s remarkably similar.
Researchers point to two likely causes of this seasonal tendency. The first is the regular influx of new money into the market because of amounts withheld from paychecks for retirement investments (such as 401(k)s, IRAs, and pension plans) as well as employer matches. The withdrawals typically occur around the turns of each month and especially around the turn of the year.
The second likely cause of this seasonal tendency, according to researchers, is the reticence of short sellers to remain short when they are on holiday or when market is closed for a three-day holiday. Not only does the stock market have two three-day holidays in the Christmas-to-New-Yearâ€™s period, but most traders take the week off between those two holidays.
Note carefully that these improved odds are still short of a guarantee. The odds of making money over this turn-of-the-year period are close to three-out-of-four, which means that there is a one-out-of-four chance you will lose. So donâ€™t throw caution to the wind.
The most intelligent way to exploit the odds is to bet that the market will rise over this turn-of-the-year period, on average, over the next several decades. If youâ€™re so inclined, this year is as good as any to start making this once-yearly bet for the next few decades.
To do so, you would want to place your bets by the close Dec. 24, and to take your money off the table by the close of this coming Jan. 5 (the second trading day of January).
The cost-benefit calculus that these odds call forth are reminiscent of the famous illustration credited to the late Paul Samuelson, the MIT economist and Nobel laureate: Would you take a gamble in which you get $100 if you win and otherwise lose $50? Most of us would decline. But if we were presented with the opportunity of a hundred such gambles, we would jump at the opportunity, since in that case we would almost certainly come out ahead.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.