Back in 1972, Yale Hirsch of the Stock Trader’s Almanac discovered the existence of the Santa Rally – and it’s been a indulgent source of Christmas-inspired stories ever since.
Over several decades, the myth that markets generally rise through the second half of December has never gone away – and it’s not the only seasonal trend in the stockmarket that still lives on.
For those who believe that markets are efficient, the idea of seasonal trends – or anomalies – may seem like a fairytale. How can it be that shares persistently perform better in January, or on Fridays, or on the days before major holidays, or in late December?
For that matter, why would shares generally perform comparatively badly in October, or on Mondays, or the days after major holidays? There are various possible reasons, but in general, nobody really knows.
Take the January Effect. Distinct from the Santa Rally, the January Effect is a trend for stocks to outperform in the first month of the year.
Research into this dates back to the 1940s. One study of New York Stock Exchange data between 1904 and 1974 found that the average monthly return in each January in those years was 3.5%. The average return in the other months was 0.5%. That’s an eye-catching difference.
That particular piece of research was mentioned in an article by Richard Thaler, who won the Nobel prize for economics this year.
Between 1987 and 1990, Thaler wrote a regular column called ‘Anomalies’ in the Journal of Economic Perspective.
They were masterful takedowns of ‘efficient market’ theory. He would set out research that strongly suggested that human behaviour causes crazy price trends at times, and that seasonal effects really do occur, although it’s unclear why.
In some cases, like the Santa Rally, the causes are often blamed on tax-driven trading. But that doesn’t fit well in regions like the UK and Australia, where the tax years don’t end in December.
An alternative cause is that fund managers ‘window dress’ their portfolios with the market’s hottest stocks (whilst selling down their embarrassing positions). Some even suggest that rising prices reflect an element of positioning ahead of the anticipated January Effect.
More broadly, research into seasonal anomalies points to much more straightforward behavioural reasons.
They include investors being happier on Fridays than they are on Mondays, and more bullish ahead of holiday periods and the start of the year.
So whether we’re posed for a Santa Rally this year or not, which stocks are outperforming everything else?
Price momentum is one of the most powerful drivers of stockmarket returns, so this week we’ve taken a look at a selection of the market’s strongest one-year performers.
Name Mkt Cap £m 1 Year Relative Price Strength 6 Month Relative Price Strength 1 Month Relative Price Strength Sector Empyrean Energy 63.3 716.3 378.9 -23.1 Energy Zoo Digital 32.7 311.5 376.9 -19.7 Technology Vast Resources 26.3 201.1 43.8 -9 Materials Blue Prism 850.4 196.8 62.3 -1.1 Technology WANdisco 232.9 192.2 32.9 -26.5 Technology Games Workshop 637.1 191.6 79.9 -6.1 Cyclicals Fairfx 125.8 180 37.9 -0.8 Industrials Keywords Studios 886 157.7 84.3 -6.9 Technology Marlowe 116.9 117.1 27 -9.3 Industrials Coats 1,190 103.7 15.8 -3.18 Cyclicals
As always, the biggest movers are often found in speculative sectors such as small-cap oil & gas explorations – and Empyrean Energy (EME) is currently in top place.
However, the current list of strongest risers over the past year is very much a mixed bag, with popular growth story stocks like Blue Prism (PRSM) and WANdisco (WAND) rubbing shoulders with the games retailer, Games Workshop (GAW), foreign exchange platform Fairfx (FFX) and thread manufacturer Coats (COA).
You can’t trade seasonal effects – but there are lessons
A lot of the research into seasonal effects like the Santa Rally suggest that while they do exist, they’re next to impossible to exploit when you take trading costs into account.
But while it might not be easy to take advantage of these anomalies, just being conscious of seasonal trends and how they can be driven by human emotion can be an advantage.
As for 2017, hopes of a Santa Rally have got off to a very slow start in December.
But there have been exceptionally strong moves in some stocks over the past year. Keeping an eye out for those with strong momentum behind them could be a much sounder strategy than waiting for Santa.
Interactive Investor’s Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard’s review of Stockopedia.com and learn more about the site.
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About the Author
Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including “How to Make Money in Value Stocks” and “The Smart Money Playbook”
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.