FTSE 100 and FTSE 250 Quarterly Review – December 2015

After the close on 2 December 2015 FTSE Russell confirmed the following changes to the FTSE 100 and FTSE 250 indices. The changes will be implemented at the close Friday, 18 December 2015 and take effect from the start of trading on Monday, 21 December 2015.

FTSE 100

Joining: DCC, Provident Financial, Worldpay Group

Leaving: G4S, Meggitt, Morrison (Wm) Supermarkets

FTSE 250

Joining: Assura, Hastings Group Holdings, Ibstock, Renewables Infrastructure Group

Leaving: Foxtons Group, Hunting, Kaz Minerals, Petra Diamonds, Premier Oil

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Does the Santa Rally exist?

The Santa Rally holds that the market is strong at the end of the year (around Christmas). Is this true?

The market is strong in December

The following chart shows the average returns of the FTSE 100 Index for each of the 12 months for the period 1980-2014.

Santa Rally [2015] 01

Over this period the average return of the FTSE 100 Index in December has been 2.0% (the second strongest average month return after April).

OK, so the average return in December is high, but is this attributable to just a few strong years?

To answer this, the following chart plots the proportion of December month returns that were positive over the same period (1980-2015).

Santa Rally [2015] 02

By this measure, December  is the strongest month in the year for the FTSE 100. In the 35 years since 1980, the Index has risen in 28 years (80%).

The market strength in December can be seen in more detail in the following chart, which plots the actual return of of the FTSE 100 for each December since 1980.

Santa Rally [2015] 03

The Index has only fallen significantly in December in four years since 1980. Until last year (2014), the Index had been on an 11-year winning streak.

When does the Santa Rally start?

So, December is strong for the FTSE 100. But is it possible to determine more precisely when the Santa Rally starts?

The following chart plots the cumulative average daily return of the Index throughout the year (more information about this chart).

Santa Rally [2015] 04

On average the UK market is strong from the start of November (this is a feature of the Sell in May effect). But we can also see an acceleration of the market at the very end of the year. To analyse this further the following chart plots the cumulative average daily return of the Index for December (i.e. the same chart as the above, but zoomed in on December).

Santa Rally [2015] 05

From this we can see that, on average, the market is flat for the first 10 trading days of December, after which it rises strongly. So, we can say that the Santa Rally starts on the 10th trading day of December.

How has this played out in recent years?

The following chart plots the FTSE 100 Index for the last two months of each year for the ten years since 2005. (The index values have been re-based to all start at 100.) The shaded area to the right indicates the final two weeks of the year.

Santa Rally [2015] 06

Yes, it’s something of a mess. So perhaps we can’t draw any strong conclusions. However, one can observe a slight tendency in most years for the market to rise in the final fortnight.

What is the cause of the Santa Rally?

Short answer: we don’t know?

There is no definitive explanation for this effect. Although various reasons have been proposed, including: fund managers window dressing their portfolios, positive sentiment in the market caused by the festive season which is accentuated by low trading volumes, anticipation of the January Effect, and tax reasons (NB. “tax reasons” are often cited in the absence of any definitive explanation).

Conclusion

  1. The UK stock market does tend to be strong in December (although it wasn’t in 2014).
  2. Stocks accelerate upwards from the tenth trading of December (which in 2015 will be 14th December). It is this last hurrah of the market – in the final fortnight – that can be called the Santa Rally.
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Volatility of daily market returns through year

A previous post looked at the average cumulative stock market returns throughout the year January to December. Beyond simple mean returns, it can also be interesting to look at how the market’s daily volatility changes throughout the year.

The following chart shows the (5-day moving average of the) standard deviation of the daily returns throughout the year for the FTSE 100 Index from 1984 to 2015. In plain English: the chart plots the range of daily fluctuations of the FTSE 100 index for each trading day throughout the year.

Average volatility of daily returns of FTSE 100 Index through year [1984-2014]

It can be seen that the volatility of daily returns is fairly even for the first eight months of the year; it then starts to increase in September and peaks in October before trailing off fairly significantly for the remainder of the year. So, according to this study of daily returns throughout the year, October is the most volatile month.


Extract taken from the newly published The UK Stock Market Almanac 2016.

Order your copy now!

 

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Average market behaviour in July (2015)

The following chart plots the average performance of the FTSE 100 Index during July since 1984.

Average month chart - July (2015)

As can be seen, historically the market tends to rise for the first week, is flat for the following two weeks, falls in the fourth week, but then ends strongly in the final few days.

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FTSE 100 and FTSE 250 Quarterly Review – June 2015

After the close on 3 June 2015 FTSE Russell confirmed the following changes to the FTSE 100 and FTSE 250 indices. The changes will be implemented at the close Friday, 19 June 2015 and take effect from the start of trading on Monday, 22 June 2015.

FTSE 100

Joining: Inmarsat

Leaving: Aggreko

FTSE 250

Joining: Aldermore Group, Auto Trader Group, B&M European Value Retail, John Laing Group, Onesavings Bank, Shawbrook Group, Wizz Air Holdings, Woodford Patient Capital

Leaving: BlackRock World Mining Trust, De La Rue, Imagination Technologies Group, Infinis Energy, Law Debenture Corp, Personal Assets Trust, RPS Group, Soco International

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First trading day of June

Next Monday will be the first trading day (FTD) of June.

Since 1984 the FTSE 100 Index has on average risen 0.21% on the June FTD, with the month’s return being positive in 55% of years.

The following chart shows the returns for every June FTD since 1984.

First trading day of June (1984-2014)

 

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Last trading day of May

Tomorrow will be the last trading day (LTD) of May.

Since 1984 the market has on average risen 0.02% on the LTD of May, with positive returns in just 48% of all years, which makes it one of the weaker month LTDs in the year.

The following chart shows the FTSE 100 Index returns for every May LTD since 1984.

Last trading day of May (1984-2014)

 

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Last trading day of March

Tomorrow will be the last trading day (LTD) of March.

Since 1984 the market has on average risen 0.11% on the LTD of March, with positive returns in just 50% of all years, which makes it the sixth strongest LTD of any month in the year.

The following chart shows the FTSE 100 Index returns for every March LTD since 1984.

Last trading day of March (1984-2014) [2015]

 

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First trading day of March

Next Monday will be the first trading day (FTD) of March.

The market has a tendency to be strong on the FTD of a month. And this effect has been even more pronounced in recent years.

However, since 1984 the FTSE 100 Index has on average fallen 0.05% on the March FTD, making it the weakest FTD of any month in the year.

The following chart shows the returns for every March FTD since 1984.

First trading day of March (1984-2014) [2015]

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Last trading day of February

Tomorrow will be the last trading day (LTD) of February.

Since 1984 the market has on average fallen 0.06% on the LTD of February, with positive returns in just 43% of all years, which makes it the third weakest LTD of any month in the year.

The following chart shows the FTSE 100 Index returns for every February LTD since 1984.

Last trading day of February (1984-2014) [2015]

 

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