We've all heard about the Santa Claus rally - stocks go up at the end of the year, there's some debate as to why, but it works, so why mess with success? Or something like that.
While skeptics warn that trying to time the market with clever seasonal gimmicks, like loading up on stocks in December, can be a risky proposition (in fact, my colleague John Heinzl dedicated an Investor Clinic column a couple of weeks ago to this very topic), there nevertheless is compelling statistical evidence that the end of the year offers unique opportunities to tap into some superior returns. And if you were planning on buying some attractive stocks anyway, why not buy them when the historical seasonal track record is favourable, right?
The question is, what are the best ways to play this? We turn to a pair of well-known seasonal investing experts for ideas.
ARRIVE EARLY, STAY LATE Brooke Thackray, Canadian-based author of Thackray's Investor's Guide, says the best time to lock in to the seasonal play is from Dec. 15 to Jan. 6.
Mr. Thackray has crunched the data for the past 50 years and found that S&P 500 stocks over this period have produced an average gain of 1.9 per cent - nearly four times the typical return of just 0.5 per cent for the average 15-day trading period.
Investors typically sell stocks for tax-loss reasons ahead of the year end, but that selling is generally done by mid-December. For the rest of the month, investors are putting money back into the market to take advantage of stocks that have been driven down by that selling. And when January begins, money managers start rebuilding their portfolios to kick off the fresh year, spurring more buying.
TAX-LOSS BARGAINS Jeffrey Hirsch and Yale Hirsch, the father and son editors of the Stock Trader's Almanac, have an even more specific approach. They recommend identifying specific stocks that have been driven down by the tax-loss selling, buying them near the end of the year, and hanging on to them through mid-February. Their data for the past 35 years show that if you bought all the New York Stock Exchange stocks that hit 52-week lows on the last Friday before Christmas, you'd generate an average return of 12.9 per cent by mid-February - thumping the NYSE composite's average rise of 3.2 per cent.
But they caution investors who are drooling at these numbers: "This … is only an extremely short-term strategy reserved for the nimblest traders," they write. "It has performed better after market corrections and when there are more new lows to choose from. The object is to buy bargain stocks near their 52-week lows and sell any quick, generous gains, as these issues can often be real dogs."