Santa Rally 2017

The Santa Rally describes the tendency of the market to rise in the last two weeks of the year.

In 2017 the FTSE 100 Index had a return of +2.6% in the last two weeks of the year. So the Santa Rally effect held in 2017.

As can be seen in the following chart, the Santa Rally has only failed to deliver in two years since 2000.

Santa Rally [2000-2017]

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Trading around Christmas and New Year

Does the equity market display any particular pattern in the days around Christmas and New Year?

Mean returns

The following chart plots the average daily returns of the FTSE 100 Index for nine days around Christmas and New Year for the periods 1984-2017 and also 2000-2017.

The nine days studied were-

  • Days 1-3: the three trading days leading up to Christmas.
  • Days 4-6: the three trading days between Christmas and New Year.
  • Days 7-9: the first three trading days of the year.

For example, since 1984 the average return of the index on the day before Christmas has been 0.24%

FTSE 100 average daily returns around Christmas and New Year [1984-2017]

Observations

  1. Market strength increases to the fourth day (the trading day immediately after Christmas). Since 1984 the fourth day has been the strongest day of the whole period, with an average daily return of 0.49% (albeit the volatility of returns on this day is high).
  2. Generally the profile of returns for the shorter time range (2000-2017) is similar to that for the whole period from 1984. The one significant difference is that since 2000 the strongest day of the period has been the first trading day of the new year. The new year generally starts strongly on the first day, with performance trailing off the following two days.
  3. The weakest day in the period is the third day of the New Year, followed by the last trading day of the year.

Let’s now see if the pattern of positive returns confirms the above findings.

Positive returns

The following chart plots the proportion of daily returns for the FTSE 100 Index that were positive on the nine days around Christmas and New for the period 1984-2017.

For example, for 84% of the years since 1984 the returns on the day after Christmas were positive.

FTSE 100 positive daily returns around Christmas and New Year [1984-2017]

The profile of behaviour demonstrated by the positive returns is similar to that for the mean returns above.

So, how did equities perform last year around Christmas compared to the average behaviour seen above?

Last year

The following chart replicates the first chart above with the average day returns for the period 2000-2017, and also plots the actual day returns for the nine days around Christmas in 2016.

FTSE 100 Index daily returns around Christmas and New Year

As can be seen, the actual returns last year roughly followed the average pattern since 2000: the strongest days were the days after Christmas and New Year, with performance quickly trailing off after New Year.


Almanac cover - 2018 (small 2)

The above is an extract from the newly published UK Stock Market Almanac 2018.

Order your copy now!

 

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Hi-Lo-Close

Analysis of the relationship between the closing level of the market and the hi-lo range during the day

The chart below shows the frequency with which the index closes near to the high (or low) of the day. The data analysed is FTSE 100 Index daily data since 1985. The analysis first takes the day’s hi-lo range, and then calculates three threshold levels (1%, 5%, and 10%).

For example, if a day’s low is 50 and high is 70, then the Hi-Lo range would be 20. And the 1%, 5%, and 10% thresholds would 0.2, 1 and 2. The day would be said to close within 10% low of the day if the closing price was below 52. The day would be said to close within 5% of the high if the closing value was above 69.

For example, since 1985 the FTSE 100 Index has closed within 10% of its daily high on 20.8% of all days, and it has closed within 1% of its low 5.6% of all days.

Frequency of FTSE 100 Index closing near high or low of the day

An obvious observation to make is that the Index closes more often near its high of the day than the low. In nearly 1 in 10 days the index closes within 1% of the high of the day.

The effect on returns the following day

Continuing this analysis of where the index closes relative to the Hi-Lo range of the day, the following chart shows the performance of the FTSE 100 Index on the following day, split by where the index closed the previous day relative to that day’s Hi-Lo range.

For example, on the days when the index closes within 10% of its low for the day on average the index return is -0.005% the following day; and when the index closes within 1% of its high for the day on average the index return is 0.16% the following day.

Hi-Lo-Close effect on following day returns

As can be seen, the nearer the index closes to its high of the day, the higher the following day’s return. The other striking observation is that, whereas a close near the day’s high is associated with relatively strong returns the following day, a close near the day’s low has little effect on the average return the following day.


Almanac cover - 2018 (small 2)

The above is an extract from the newly published UK Stock Market Almanac 2018.

Order your copy now!

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Market behaviour on the days around Budget Day

The United Kingdom used to have have two annual Budgets (what the UK Treasuary calls “fiscal events”), one in the Spring and the other in the Autumn. But from 2017 it is switching to having just one Budget in the year – in the Autumn. The reason is to allow major tax changes to occur annually, before the start of the fiscal year. (Further info on the new Budget timetable can be found on the Treasury web site.)

So, 2017 saw the last Spring Budget, and the Autumn Budget will take place on Wednesday 22 November 2017.

Below we look at the immediate effect of the Budget on three asset classes in the three days around Budget Day:

  1. B(-1): the day before the Budget
  2. B(0): Budget Day
  3. B(+1): the day after the Budget

Equities

The following chart plots the daily returns for the FTSE 100 Index for the three days around Budget Day for the years 2000-2017. For example, in year 2000 the Budget was on 21 March, the day before the Budget the FTSE 100 rose 1.04%, on Budget Day the index fell 0.13%, and on the day after the index fell 0.12%.

Daily returns for FTSE 100 for the three days around the Chancellor's Budget [2000-2017]

GBPUSD

Similar to the above, the following chart plots the daily returns of GBPUSD around Budget Day from year 2000.

Daily returns for GBPUSD for the three days around the Chancellor's Budget [2000-2017]

Gilts

And, finally, the performance of gilts (the 8% Treasury 2021 is taken as a representative gilt) around the budget.

Daily returns for 8 Treasury 2021 for the three days around the Chancellor's Budget [2000-2017]

Summary

The following chart shows the average returns for the period 2000-2017 for each respective asset class for the three days around the Budget.

Average returns for the three days around Chancellor's Budget [2000-2017]

And the following chart shows the proportion of positive returns for the three asset classes in three days around the Budget.

Positive returns for the three days around Chancellor's Budget [2000-2017]

On average since 2000 the equity market has seen mildly positive daily returns on the day before the Budget and on Budget Day itself. But the most significant observation is that equities have been weak on the day after the budget.

On average the pound against the dollar has seen little change on the day before the Budget and on Budget Day itself, but has been strong on the day after the budget.

While, on average, gilts have been weak for all three days, with the weakest day being the day after the Budget.

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Day of the week grid

An update of the Day of the Week grid.

This is a table showing the daily returns of the FTSE 100 Index for every day so far in 2017. Positive returns are highlighted in green, negative returns in red. (White cells indicate a market holiday.)

Day of the week grid [Nov 2017]

Pattern-match away…!

Other articles looking at returns on days of the week.

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UK equities in days around parliamentary elections

The following chart plots the number of times the FTSE All-Share Index has had positive returns in the 7 days around UK parliamentary elections since 1970.

For example, in the 12 elections there have been since 1970 the Index has risen 7 times on the third day, E(-3), before election day E(0).

UK equity performance in days around elections - positive returns

The following chart is similar to the above but plots the average day returns for the Index on each of the 7 days around elections.

For example, in the 12 elections since 1970 the Index has had an average return of 0.1% on the day before, E(-1), the election.

UK equity performance in the days around elections (average returns)

Interestingly, the market  has tended to see positive returns in the days immediately around elections, with the strongest day being election day itself with an average return of 0.6% (perhaps a .relief rally marking the end of the tedious election campaigns?)

The day following elections has a negative average return of  0.04% (as investors realise the ramifications of the election result?)


Further articles on the market and elections.

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U.S. Tax Day

Tax Day in the United States refers to the day by which individuals must submit income tax returns to the federal government.

In the past Tax Day has moved around a bit, but since 1955 it has been fixed at 15 April. Although there are exceptions due to the close proximity of the Emancipation Day holiday in Washington State D.C. Such that since 2007 when 15 April falls on a Friday then Tax Day is moved to the following Monday, and when 15 April falls on a weekend Tax Day is moved to the following Tuesday.

This year, 2017, 15 April is a Saturday and so Tax Day will be Tuesday, 18 April.

It is probably not too controversial  a claim that most people dislike filling in forms and paying taxes. Could this dislike affect individual investors attitude to risk around the time of Tax Day and. if so. could that in aggregate be sufficient to influence equity returns around this period?

Let’s see…

The following chart plots the proportion of weeks that saw positive returns in the S&P 500 Index for the two weeks before Tax Day and for the one week following Tax Day for all years since 1955. For example, the S&P 500 had positive returns in the week two weeks before Tax Day in 69% of years since 1955.

S&P 500 in weeks around Tax Day [1955-2016] - Positive week returns

As can be seen, over the three-week period there was a moderate decline in the proportion of positive weekly returns.

The following chart looks at the same period and weekly frequency, but plots the average weekly returns.

S&P 500 in weeks around Tax Day [1955-2016] - Average week return

Here we can see relatively high returns two weeks before Tax Day, although this overlaps with the start of April which is usually a strong period for equities anyway. The week leading up to Tax Day is relatively weak, and then there’s something of a small relief(?) rally in the week following Tax Day.

Let’s now focus in on the days around Tax Day.

The following chart plots the proportion of days that saw positive returns in the five days around Tax Day. For example, since 1955 the S&P 500 Index has seen positive returns on Tax Day itself (TD(0D)) in 67% of years.

S&P 500 in days around Tax Day [1955-2016] - Positive day returns

Historically we can see that returns have been depressed leading up to Tax Day, with the strongest returns in the 5-day period seen on Tax Day itself.

The following chart looks at the same period and daily frequency, but plots the average daily returns.

S&P 500 in days around Tax Day [1955-2016] - Average day return

The same behaviour profile can be seen as in the previous chart. The weakest average daily returns in the period have been seen on the trading day two days before Tax Day. While the strongest average daily returns have been on Tax Day itself (with an average daily return ten times the average daily return for all days since 1955).

Conclusion

The results here are not strong, but there is some evidence that equities are relatively weak in the days immediately before Tax Day, but the market is strong on Tax Day itself.

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United States presidential inauguration day

The United States presidential inauguration day used to be on 4th March, but in 1937 the Twentieth Amendment changed the date of inauguration day to 20 January. If that day is a Sunday, inauguration day is moved to 21 January.

Has this day had any significant effect on the stock market?

Let’s see.

The following chart plots the daily returns for the S&P 500 Index for inauguration day (ID) in the years from 1953 to 2009. Note: the chart only includes inauguration days for first terms (on the grounds that the market most likely knows what to expect with second-term presidents).

US president inauguration days (first term) [1953-2009] 1

As can be seen shares have been weak on inauguration days. Since the 1963 inauguration of Lyndon B. Johnson the S&P 500 has been down on every inauguration day.

The following chart plots the average daily returns for the S&P 500 Index for the trading day before inauguration day, the day itself and the day after.

US president inauguration days (first term) [1953-2009] 3

Since 1953 the average daily return for the S&P 500 on inauguration day has been -1.1%. For the day after ID the average daily return is 0.7%, so there does seem to be a partial relief rally afterwards.

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A very average start to 2017

The following chart plots the daily returns of the FTSE 100 Index for the nine days around Christmas and New Year.

The blue bars plot the average daily returns of these days for the period 2000-2016. The orange bars plot the daily returns for the last nine days.

FTSE 100 Index daily returns around Christmas and New Year [2017]

As can be seen the actual daily returns for the last nine days have been on the whole pretty close to the average daily returns seen for the last 16 years..

  • Strong returns have been seen on the trading days following Christmas and New Year.
  • After the first day after New year, returns have trailed off (days 8 and 9 in the chart).
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Tuesday reverses Monday

Do market returns on Tuesdays reverse those on Monday?

We first looked at this in 2013 (in this article), so time to see if anything has changed.

First, the following updates the chart to 2016 plotting Tuesday returns for the FTSE 100 Index split by whether the previous day’s returns were positive or negative. Two time periods are considered: 1984-2016 and 2000-2016.

For example, for the longer period, the average return on Tuesday when Monday was up is 0.02%, while the average Tuesday return when Monday was down is 0.09%.

FTSE 100 returns on Tuesdays when Monday was up-down

While the figures have marginally changed from the previous study in 2013, the overall finding is the same: namely that the theory that Tuesday reverses Monday does not seem to hold. Since 1984 it has done so when Monday returns have been negative, but not when they have been positive. 

As in the 2013 study, the theory has been valid for the market since 2000.

The previous study suggested that further analysis might include a filter on the size of the Monday returns. This is done in the following chart, where Tuesday returns are only considered if Monday’s returns were beyond a certain threshold (i.e. of a certain size). The (arbitrary) threshold chosen was 1 standard deviation for Monday’s returns.

FTSE 100 returns on Tuesdays when Monday was up-down (1SD filter)

It can be seen that limiting the analysis of Tuesday returns to just large movements on Monday (i.e. beyond 1 standard deviation) does help the reversal theory. In this case, if the market rises on Monday, then on average it falls the following day (albeit a pretty small average fall), and if the market falls on Monday, the market rises (fairly strongly) on the Tuesday.

Let’s now look at how the theory has been holding up in recent years.

Recent years

The following chart is similar in design to the previous charts, but this time it plots the reversal results for the discrete years 2013 – 2016.

FTSE 100 returns on Tuesdays when Monday was up-down [2013-2016]

First, when the market is up on Monday, all four of the past four years has failed to support the reversal theory as Tuesday has followed with positive returns as well. When Mondays are down, in three of the past four years Tuesdays have seen positive average returns (the exception being 2015).

Exploiting the reversal effect

OK, so how to exploit this?

The following chart plots the cumulative value of a portfolio that invests in the FTSE 100 just on Tuesdays when the previous day saw negative returns. For the rest of the time it is in cash.

In the 2013 study a variant portfolio was also considered, that as well as going long Tuesdays following negative Mondays also went short Tuesdays following positive return Mondays. There’s currently not much point in considering this as the reversal effect is not working for positive Mondays.

So, instead the variant second strategy studied here is as above (i.e. long Tuesday following a negative Monday) but with a 1 standard deviation filter applied to the Monday return (i.e. the strategy only goes long on Tuesday if the Monday negative return is a greater than 1 standard deviation return).

Strategies exploiting the Tuesday reversal effect [2000-2016]

Since 2000 it can be seen that the simple long Tuesday strategy out-performs the benchmark buy-and-hold FTSE 100 portfolio. The variant 1SD strategy only marginally out-performs the simple long Tuesday strategy, but does so with with a greatly reduced volatility.

 

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