Since 1950 the average daily return on the S&P 500 has been about 0.0368% which annualizes to just about 8% a year And that is a good reward for doing nothing. But we have written several times, that a disproportionate amount of the S&P return is realized around holidays.

Christmas gives another example of this effect.

The day before Christmas has an average daily return of 0.22% and the day after Christmas has an average daily return of 0.28%. Another way to think about this is that the day before Christmas has a return 7 times higher than the unconditional average and the day after has a return that is 9 times higher than normal. If you are at all interested in timing the markets, these are great days to be long.

I know some of the readers of this blog, and I know what they will be thinking now:

“What about the other days close to Christmas? Shouldn’t we find the optimal entry and exits?”

Obviously, this is up to the individual, but you need to be very careful. We only have 75 instances to look at. We are already playing with a small sample. “Optimizing” here, trying to go beyond “it goes up at Christmas”, is very likely to just be overfitting. The only reason I trust the effect at all is because it is a subset of the more general holiday effect. The edge here is: it’s Christmas. Sometimes, you need to accept that you know only a little and move on to finding something else to trade as well.

If you go down the optimization route you will actually find that the 6^th trading day after Christmas is the best performer. But this is really the “New Year’s Day” holiday effect. As much as possible, I like to keep edges separate. It makes PL attribution much easier. It makes everything easier (also, if we include this day now, I won’t have anything to write about next week).

Second, I wouldn’t recommend you only trade this effect, or any of the calendar effects. The excess returns on these days are phenomenal, but there is no reason to forgo the positive returns on the other days. Only investing in the two Christmas days would have increased your initial $100 to only $146. Compounding is a hell of a drug, and the US equity markets give great long term returns to do that compounding. Getting longer on the anomalously good days makes a lot of sense. Picking only those days doesn’t.

It seems like Santa doesn’t care much if investors have been good or bad or pouting or crying or whatever. All you must do to get a present is to be in the market for the days around Christmas. Ho, ho, ho.

Disclaimer

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting, or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact HTAA or consult with the professional advisor of their choosing.

Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.

The S&P 500® Index is designed to measure the performance of the large-cap segment of the US equity market. It is float-adjusted market capitalization weighted. Any reference to or definition of the S&P 500 within this material is provided solely for informational and illustrative purposes.