Will December Be Up Or Down?

December Tends To Be An Up Month, If The Market Is Up The Preceding 11 Months

One of the things that we are constantly driven to do at TradingMarkets is to publish original research that can provide an edge for traders. And we believe that the most useful information for traders is information that is quantified and statistically backed.

The Phenomena

During the month of November,  the S&P 500 has broken to new highs. With the end of the month just a few days away, we decided to ask this question:

Is there a directional bias for the month of December when the S&P 500 is up for the year at the end of November?

We looked all of our available data on the S&P 500 which goes back 42-years to 1963. Over that period we counted the number number of years that were up through November and looked at how strong December was in those instances.

The Results

Our findings are interesting and potentially valuable to active traders and investors. There has been a strong directional bias for December when the S&P 500 was up into the end of November. Let's break this apart and walk through process that led us to the conclusion.

We found out that 27 of the 42 years we tested were up through November. For those 27 years, 78% (21 out 27) of the Decembers wound up closing higher by December 31. And 2.01% was the average gain for those up Decembers. Clearly, there would been an edge if you bought stocks during Decembers that were preceded by a market that was higher for the year at the of November. It's good to keep in mind that, if you were unaware of this research, your edge would have been diminished. The average gain for all 42 Decembers during the entire test period was 1.54%. While there was an upward bias for Decembers overall, the performance of Decembers in which the S&P 500 was up by the end of the November, was significantly better.

Summary and Conclusion

While we do not advise that anyone trade on the basis of this information alone, this research from TradingMarkets is valuable when it is combined with other trading strategies or market indicators that you may already be using. During years in which the S&P 500 is higher by the end of November, you might consider increasing your position size when you have a signal to go long on individual stocks or stock indices. And for shorts, you might consider being for selective.

That said, let's to a quick look at this year.

In mid-October the S&P 500 bottomed and has climbed steadily, establishing a new closing high of 1248.27 on November 18. Since then it has continued strongly higher. While the market could easily pullback at any time, the recent action strongly suggests at the end of November, the S&P 500 will close for higher for year. If that happens, then our research at TradingMarkets indicates that you may have edge on the long side in December.

For years, traders have speculated about whether there is a positive seasonal bias in December. Some of observed that rallies tend to occur during the week between Christmas and New Years and called it the "Santa Claus Rally" -- but that is largely a subjective observation. Now for the first time, a statistical edge for December has been identified by TradingMarkets. During our 42-year test period, we looked at how December performed when they were preceded by up markets through the end of November. 78% of those Decembers closed higher by the last trading day of the month. While no one can predict if this edge will continue to work, we believe that this finding may provide valuable to professional traders, money managers and institutions for this coming month.