So Far, So Good

The market is off to a good start for 2011.

We’re still in the Santa Claus Rally period which runs from December 22 to January 7. Historically, the market has made 40% of its gains during this period.

Some of the market’s best days on average come during this stretch. For example, January 2 is the market’s second-best day (the best is October 20 which has often done well due to the market snapping back after big falls). December 31 is the seventh-best day and January 6 is the twelfth-best day. This is, indeed, the most wonderful time of the year.

Compounded with the new year is the turn-of-the-month effect. Historically, if you had been in the market for just a seven-day run each month—the last four trading days plus the first three trading days—you would have outperformed the market. For the rest of the month, the market is down. Also, the December-to-January turn has been the top-performer. Obviously, taxes and trading costs would have eaten your gains if you really had gone in and out of the market so frequently.

Another simple idea has worked well over the past 11 years — just invest on the first day of the month:

An S&P report recently found that someone who invested $10,000 in the S&P 500 on Dec. 31, 1999, and left the money there until Dec. 1, 2010, would have just $8,209. An investor who was in the market only on the first day of every month over the same time — for example, buying at the close on Dec. 31 and selling at the close of the first trading day in January — would have $13,816.

That’s nearly 70 percent more than buying and holding the whole time. S&P didn’t include reinvesting dividends in either scenario because of the complications of figuring out which companies paid dividends on the first trading day of the month for 11 years. But even if you include all possible dividends for the buy-and-holders, the first-day trade strategy came out 33 percentage points ahead.

Posted by on January 3rd, 2011 at 11:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.