Seasonality forecasting… What can traders expect over the festive period?
In theory at least, technology is supposed to make everything (including the markets) more efficient. One-touch trading, asset information beamed to everyone’s phones immediately on release, forecasting and analysis tools: all of this should mean that the price of an asset or security at any one time should be an accurate reflection of the fundamentals – regardless of date, time and whether or not there’s a holiday around the corner.
Yet despite this, seasonality remains a thing – and Christmas is one of those times when certain predictable patterns become evident. At the same time, there’s the ‘Christmas boost’ to factor in; especially if you’re targeting shares in the retail and leisure sectors.
Here, we take a look at some key stock categories and indices to discover how they tend to perform before, during and after the festive period.
Blue Chip Companies
TD Direct Investing analysed Stock Market Almanac data to measure the historic behaviour of the FTSE 100 Index during the three days leading up to Christmas, the three trading days between Christmas and New Year and the first three trading days of the New Year. Data studied was from 1984 to 2004.
Looking at the Stock Market Almanac figures, the average daily movement on the FTSE 100 is +0.03%. The daily average returns over those nine days around Christmas and the New Year were all found to be higher than the average. The strongest day of the whole period is the first trading day after Christmas. In 81% of years between 1984 and 2004, the FTSE 100 Index saw daily growth on this day – and the average increase was 0.34%.
So statistically at least, if you are targeting bluechips, you are more likely to see above average positive movement on your targets over the festive period. Tip: remember that this year, London’s first trading day after Christmas is 29th December. This is when, statistically, you are likely to see the biggest FTSE 100 increases of the Christmas period – despite the dearth of the usual market data that normally drives movement.
Struggling companies
Christmas and New Year is seen as a time for stepping back, reviewing your priorities and making changes. This applies as much to traders and investors as anyone else.
There’s also a tax planning dimension to this. Especially for those trading and investment companies whose accounting periods correspond with the end of the calendar year, there may be a desire to ditch those stocks that have fallen in value throughout the year in order to claim capital losses.
The upshot is that those companies who have had a bad year are more likely to experience a further loss of support – not because of any specific developments on the fundamentals but more because investors across the globe are busy getting their house in order by discarding poor performers from their portfolio.
If you are looking for targets to take short positions on during the Christmas period, check the relevant annual chart for that particular stock. This year, companies that have suffered from the effects of the commodities price collapse are at particular risk of having a bad Christmas: as such, look out for a leak in support for the likes of Amec Foster Wheeler, BHP Billiton and Drax Group.
As money is taken out of poorly performing stocks linked to risky sectors, the winners tend to be those companies that have experienced consistent performance and that look set to close markedly higher than a year previously. As such, don’t be surprised to see a Yuletide boost for reliable FTSE 100 blue chips such as BT Group, Capita and Unilever.
This shifting of focus on the part of investors helps to explain why reliable bluechips tend to do well over the season.
Retail stocks: counting the cost of the UK’s shopping spree…
By the second week in January, just as the decorations are returned to the loft, it’s time for another Christmas tradition: casting a critical eye over the big retailers’ sales numbers.
Last year, for instance, the release of strong Christmas sales figures was enough to see Tesco and Sainsbury’s notch up 3.6% increases during the week beginning 12 January. For these old giants, it was a case of Christmas bringing brief respite from a long-term pattern of decline in the face of competition from discount supermarkets and online platforms.
Meanwhile, lean, mean internet sellers were reaping the benefits of the still-growing popularity of online shopping, with ASOS seeing an 8.6% hike that week.
The outlook for Christmas 2015 looks positive, with The Retail Bulletin reporting predictions of a 2.5% increase on Christmas retail sales compared to last year.
The “January Effect”: only for small-caps?
The perceived wisdom is that January is the strongest month of the year for market performance. Since 2000 however, this rule does not seem to apply in the UK – at least not when it comes to the FTSE 100 Index. On average, over the last 15 years, the second week of January has been one of the weakest weeks of the year. It’s only by the middle of the month that these prices tend to rebound.
For small caps however (i.e. those companies with a market capitalisation of between £150 million and £500 million), it’s a different story. Once Christmas is out of the way, Stock Market Almanac figures suggest that these stocks tend to outperform the FTSE 100 by an average of 3.7% through January.
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