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Friday, November 25, 2022
Rise and shine deal hunters!
For those who slept off their tryptophan hangovers and are not running headlong into a phalanx of Black Friday deals just yet, a half-day of potential “deals” awaits in the stock market.
Yes, volume is expected to be low, and volatility has already trailed off the year’s elevated levels heading into the holiday.
But the truncated Black Friday session has presented some opportunities over the years to those investors willing to sit up to the market table.
Only last year, the post-Thanksgiving session witnessed the Dow suffering its worst day of the year, as a new COVID variant dubbed omicron first entered the scene. WTI crude oil crashed 13% that Friday — its biggest drop since negative trading in the early days of the pandemic.
If we dial back the market clock to Thanksgiving 2009, as the world was still reeling from the Global Financial Crisis, we find plenty more volatility to go around.
Early Black Friday morning in 2009, risk markets were selling off hard, as a deal to save Dubai’s sovereign debt hung in the balance. US stock futures were down 2% as Europe began its trading day. But an eleventh-hour deal roused investors’ risk appetite. The day closed green and the lows wouldn’t be revisited for over two months.
And back in 2014, a surprise deal from OPEC to keep oil production levels unchanged sent oil prices towards multi-year lows over the Thanksgiving and Black Friday trading sessions.
To be fair, the outsized price movement on these Fridays is the outlier. The norm is a low-volume, low-range day that’s part of a larger, bullish seasonality leading into February.
Jeff Hirsch at The Stock Trader’s Almanac has been writing about these trends for decades. (His father, Yale Hirsch, first discovered and wrote about the Santa Claus Rally in 1972.)
Hirsch has found that November to January is “the year’s best consecutive three-month span.” This year, this period also falls within what Hirsch dubs the “sweet spot” of the four-year presidential cycle — from the fourth quarter of the midterm year through the second quarter of the pre-election year.
Putting it all together, here are the stats for a long trade spanning from the Tuesday just prior to Thanksgiving through the second trading day of the new year, which encompasses the narrowly-defined Santa Claus Rally.
Since 1950, the S&P 500 has posted an average gain of 2.65% over this period, with a median increase of 2.40%. During the average winning period, the index is up 3.78% and down 2.01%, on average, when the market drops. For the Russell 2000, the average gain is 3.38% and the median return is 3.57%; during the average winning period, the index gains 4.98% and loses 2.69% during the average losing period.
During this period, the S&P 500 sports an 80.6% win rate, and the Russell 2000 a 79.1% win rate. Not bad for bulls looking for some consolation in this year’s market.
Hirsch notes this is an unusual year given the 15.5% drawdown seen for the S&P 500 so far this year. And while the major indices are unlikely to claw back the losses so far this year, the bullish seasonality still exists.
As Hirsch writes: “The fact that November 2022 is up so far is supportive for continued upside.”
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