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Holiday Trading Has Historically Favored Bulls

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Those who have recovered from their food comas and are not yet charging headfirst into the ranks of Black Friday shoppers and discounts have the opportunity to take advantage of potential bargains on the stock market trading during the first half of the day.

It is true that volume is anticipated to be low, and volatility has already begun to decline from the extreme levels it reached earlier in the year leading into the vacation.

However, the shortened trading session on Black Friday has, throughout the course of the years, offered some opportunities to those who were ready to creep closer to the markets table. The day after Thanksgiving in the previous year was when the Dow experienced its worst day of the year, and at the same time, a new COVID variation that was given the name omicron made its debut in the market. On that Friday, the price of WTI crude oil fell by 13%, which was its largest loss since it began trading negatively in the early days of the pandemic.

If we turn the clock back to Thanksgiving of 2009, when the world was still reeling from the Global Financial Crisis, we find that there was a lot more volatility to go around at that time.

In the early hours of Black Friday in 2009, risk markets were experiencing severe selling pressure as a potential agreement to rescue Dubai’s sovereign debt hung in the balance. Futures for U.S. equities were trading 2% lower as trading got underway in Europe. However, a last-minute agreement stimulated the appetite for risk among investors. The day ended with a green candle, and the day’s lows would not be surpassed for more than two months.

And during the Thanksgiving and Black Friday trading hours in 2014, a surprising agreement from OPEC to maintain oil production levels unchanged sent oil prices towards multi-year lows. This occurred during the trading sessions for both holidays.

To be fair, the disproportionately large price change on these particular Fridays is the exception. The typical pattern leading up to February is for the market to have low volume and a narrow trading range on days that are otherwise bullish.

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Jeff Hirsch, who works for The Stock Trader’s Almanac, has been covering similar tendencies in his articles for many years. (In 1972, his father, Yale Hirsch, was the one who first found out about the Santa Claus Rally and reported about it.)

According to Hirsch’s research, the period beginning in November and ending in January is “the year’s best consecutive three-month interval.” This year, this period also falls within what Hirsch refers to as the “sweet spot” of the four-year presidential cycle, which spans from the fourth quarter of the midterm year to the second quarter of the pre-election year. This “sweet spot” occurs between the pre-election year and the fourth quarter of the midterm year.

To put it all together, here are the statistics for a long trade that lasted from the Tuesday immediately before Thanksgiving to the second trading day of the new year. This trade incorporates the Santa Claus Rally, which is a more specific term for the rally that occurred during this time period.

The S&P 500 index has experienced an average growth rate of 2.65% since 1950, with a median growth rate of 2.40% over this time period. The index achieves a gain of 3.78% during the average period in which it wins, while it suffers a loss of 2.01% during the average period in which the market loses. The average gain for the Russell 2000 is 3.38%, while the median return is 3.57%; the index gains 4.98% during the typical winning period and loses 2.69% during the average losing period.

During this time span, the S&P 500 has posted a win rate of 80.6%, while the Russell 2000 has posted a win rate of 79.1%. Not a bad result for those bulls who are searching for some solace in the market this year.

Given the fall of 15.5% that has been recorded for the S&P 500 so far this year, Hirsch adds that this is an uncommon year. There is evidence of bullish seasonality even if it is quite doubtful that the major indices will be able to recover from the losses they have incurred so far this year.

According to what Hirsch writes, “The fact that November 2022 is up thus far is positive for more upward (movement).”

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