It’s that time of year again.
No, I’m not talking about time to get your holiday shopping done (though that’s likely to apply to most readers). Rather, I’m talking about the time of year when the strongest seasonal patterns tend to take place in the markets. They are driven by a combination of things like year-end tax-related portfolio adjustments (think tax-loss selling in the stock market ) and accounting year-end corporate cash movements (think repatriation of foreign profits), among other things.
The result of all this is patterns like the so-called Santa Clause rally which can take place in the stock market, and the January effect in previously beaten down stocks (ones which were subject to tax-loss selling in December, though this effect has waned a bit). We also see some very interesting patterns in foreign exchange rates in December and January. These are well documented in the report Opportunities in Forex Calendar Trading Patterns, but the one which is likely to get the most attention among traders and market observers is the tendency for the euro to be strong and the dollar weak in December, but then to reverse course come the new year.
That begs the question, though, whether it makes sense to trade the markets during the holiday period. This question comes up so often that it was featured as one of those common inquiries answered in Trading FAQs by the experienced traders and market pros who contributed to that book. If you are involved in social trading you will no doubt notice that some traders are active during the holidays and some just decide to pack it in and wait until the markets are back to full participation in January.
Volumes definitely drop off in December as the month progresses. There’s no doubt about that. This is particularly so in years when there’s been a lot of action and significant developments heading up to that period – think elections, major fiscal or monetary policy decisions, etc. That tends to lead mentally exhausted market players to just want a break when they can get it, often resulting in very dull days.
That said, the light volumes can also produce very sharp market moves. If something does happen, because there are so few traders looking to play against a rally or sell-off, the market can go a long way before finally running out of steam. This creates a kind of barbell type distribution to market volatility where you tend to have a lot of very narrow days with a few high movement ones mixed in.
It must be noted that some traders and trading systems can deal with this well. Some can’t. Whether you trade for yourself or through an auto-trading or trade matching system like Trade Leaders, it is worth understanding how your account performs in different types of market conditions. Knowing what the year-end and year-beginning markets are like, you can then make adjustments to either reduce your risk of loss or take better advantage of the opportunities presented.