Spot the Best Year-End Opportunities

12/01/2011 10:35 am EST

Focus: STRATEGIES

Rob Hanna

Co-Founder, Investiquant

Rob Hanna discusses the stock market’s late-year seasonal tendencies and where good buying opportunities are likely to be presented after Thanksgiving and in the weeks that follow.

We’re taking at look at seasonality with Rob Hanna. Rob, we’re coming into a sweet spot of the year; what are you seeing seasonally?

Yeah, we are coming into a nice sweet spot. Thanksgiving always provides some nice seasonality for traders.

It’s one of the times of the year where I pay attention to buying into the market on the Wednesday and Friday after Thanksgiving, and then sometimes the Monday following Thanksgiving tends to be seasonally weak, but beyond that, December is a very strong month for the market, and there are some good times to get into trades in December.

What makes December so strong?

Well part of it I believe is that there’s a lot of tax selling in December, there is a lot of maneuvering of portfolios, and generally, you’ve got people in a good mood in December, too.

That holiday spirit.

Yeah, so you tend to get some good movements in December. 

Option expiration week in December I want to say is the happiest time of the year, as opposed to actual Christmas Day, and then you get a few days right around Christmas that are really strong, too. So it tends to be a nice time of year, especially for small-cap stocks as opposed to the large-cap stocks. 

See related: 5 Small Caps with Growth Potential

Really, so what strategies would you be looking at?

Well, a lot of times what I’ll do in December is I will look to buy during option expiration week if we have a little dip in the S&P 500 or in the Russell 2000. I’ll look to hold that through near the end of the year, and you can normally get a nice move out of that. 

I’ll take some profits off the table if we get a move up because that’s just in my nature to take a little bit off the table and lock in some gains. 

Then one of my favorite seasonal edges to play—there’s really two—is beginning-of-the-month seasonality. It’s pretty well known the first day of the month tends to be a very strong day, and that is especially true when the market is in an uptrend. It’s especially true if the market hasn’t already made a surge going into the beginning of the month.

If those conditions are in place, then a lot of times you’ll get a good first day of the month. I tend to do a lot of buying on the last day of the month anticipating that the next day will get me some gains.

What’s the other strategy that you mentioned?

Fed days. Eight times a year, the Fed will hold their open market days, and those days have very, very strong tendencies. The overall tendency of Fed days is that they’re up, but beyond that, again, if you get a down day the day before, or if you get a selloff late in the afternoon the day before, you’ve got a good chance of making some money on the Fed day. 

And what’s interesting about Fed days is that most of the edge comes from the close the day before until the announcement. Most people try and say, “OK, what’s going to happen with the announcement?” and expect the market to move a lot before that, but the greatest edge comes before the announcement actually comes out. 

I think it’s because people are positioning ahead of the announcement. Once the announcement comes out, it’s tough to know what’s going to happen and how the market will react.

Right, buy the rumor, sell the news.

Right, so if you can get in ahead of the announcement, a lot of times what I’ll do is I’ll buy the day before and I’ll sell at 2 pm if the announcement is going to be at 2:15 pm.

Does the fact that the Fed came out and said that they’d hold short-term interest rates at virtually zero well into 2013 change that at all, or do you still see opportunities?

No, there are still opportunities. It used to be that everyone was kind of hanging on whether the Fed is going to cut rates or raise rates. That’s the big question going into the meeting all the time.

Well, you don’t have that question anymore, but they now have QE1, QE2, Operation Twist, and if QE3 is coming out, and whatever their forecast is, people still react to it. It tends to get a big reaction.

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