by Daniel Putnam | November 20, 2013 8:17 am
Thanksgiving week is almost upon us. For most Americans, that means travel, football and binge-eating. But for traders, the coming week also is known as a time of low volume and — one would think — quiet markets.
In recent years, however, Thanksgiving week volatility has increased considerably. What can traders do with this information?
The chart below shows the 10-year moving average of the absolute value of S&P 500 returns in Thanksgiving week for the past 20 years. For instance, the data point for 1993 shows the average from 1983-92, and so on. Absolute return means that a return of either -2.0% or 2.0% is recorded as a 2-percentage-point move.
With this in mind, this chart shows that the average volatility of Thanksgiving week returns has gradually doubled in the past two decades. While the vast majority of returns in the 1980s and early ’90s were in the range of -1% to 1.5%, recent years have brought moves of 10.73% (2008), -4.92% (2011) and 3.50% (2012). This suggests that lower volume has been exacerbating volatility rather than dampening it.
It also tells us that Thanksgiving week — far from being the dull, quiet period that would be expected — is gradually becoming a time in which traders can make some money.
But which directional bet has been the most profitable over time?
The numbers show that in the past 30 years, the S&P 500 has performed very well in the holiday week, with an average gain of 0.62%. That might not sound like much at first, but that works out to an annualized gain of nearly 38%. The market has risen in 19 of those 30 years (63%), indicating that the odds are with the bulls. (The full data set is available here.)
Unfortunately, year-to-date returns prior to Thanksgiving week don’t offer much help in predicting subsequent performance. The only meaningful pattern is that stocks have declined a greater percentage of the time when YTD returns are already negative heading into the week. (This has occurred on five of nine occasions).
But when the market is up by a large degree, as is the case this year, stocks have only provided a slightly higher return. In the 30 years encompassed in the data set, the S&P has entered the holiday week with a double-digit gain on 12 occasions. Stocks rose in seven of those years (58%), with four declines and one year virtually unchanged. The average gain was 0.7%, only modestly above the 0.62% for the full 30-year data set.
Even though the market has come a long way in the past month — and demonstrated a very shaky performance so far this week — historical trends indicate that the winds are firmly at its back in the week ahead.
Traders should incorporate this data into their thinking in the coming days.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
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