With the Christmas season upon us, I thought it would be interesting to review how the S&P behaves in the days just before Christmas. Do the days just before this holiday tend to be bullish, bearish, or neutral?
To test the market behavior just before the Christmas holiday I will use the S&P Cash index back in 1960. I will create an EasyLanguage strategy that will enter a trade X days before Christmas and close that trade on the opening of the first trading day after Christmas. Each trade will dedicate $100,000 to purchase shares. Stops, and both commissions and slippage are not utilized in this study.
Ten Days Before Christmas
First let's look at the 10 days before Christmas. What happens if we enter a trade X days before Christmas and close that trade on the open after Christmas? By using TradeStation's optimize feature I can systematically test each day over the historical data. The results of each test is the generated P&L for each iteration and is depicted in the bar graph below. Looking at the graph, each bar on the x-axis represents the number of days before Christmas.
It appears that the 10 days before Christmas all show positive P&L. In general, the longer you're holding period before Christmas the better.
Ten Days After Christmas
Using a similar trading system, I will look at entering a trade on open of trading day following Christmas and holding that trade for X days. Below is a bar graph showing the days 1-10 after Christmas. Again, each bar represents P&L and the x-axis is the number of days the trade is held.
Historically, all days after Christmas in our study have returned positive results. Unlike the 10 days before Christmas, in this case it appears there is not much gain for holding beyond five days.
The Christmas Trade
Based on the information above, which seems to show a strong bullish biased for the days immediately before and after Christmas, I'm going to create another strategy that will open a trade five days before Christmas and closes that trade five days after Christmas. I picked five days simply because it was the middle value (1-10) for the days before and after Christmas we tested. Last year's Christmas Trade (December 2019) was a winning trade. It's pictured below.
Christmas Trade 2019
When you combine all the trades going back to 1960 we get the following equity curve and performance.
Conclusion
There certainly does seem to be a very strong bullish tendency around Christmas. However, the last equity high was in 2014.
Can you take advantage of this in your trading? Perhaps. Remember, the code with this article is not a complete trading system, but an indicator to help me gauge the market behavior around the Christmas holiday. If you have trading systems or trade a discretionary method around these days before and after Christmas, you might use this knowledge to ignore short signals, or modify your exit.
This is one of the strongest seasonal periods. And what’s more interesting, we can find the same bullish bias around european equities, crude oil and on vix contango.
https://backtestingvix.wordpress.com/
Thanks for posting this article Jeff. There is certainly opportunity to turn the seasonal strength of the stock market around Christmas into an effective trading system.
I have found that adding a market direction filter to ensure you are only buying into a relatively strong market and only buying strong stocks within that market make a big difference to the edge you generate.
There is also quite some advantage in adding an additional exit to get out of any stock holding which starts falling during this period of seasonal strength due to some stock specific factor.
While this is only a once a year trade, it can be a valuable part of a portfolio of trading systems.
Thanks again
Adrian
Hey Adrian. You’re welcome and thanks for the ideas. I often see a market direction filter helpful as well.