As we head into the end of the year and the Holiday season, I wanted to give an overview of what the last three weeks of the year will look like from a trading perspective. One of our main focuses as traders is to apply ourselves the hardest when there is volume and activity. Without those, the chances of trades working diminishes. December has a lot of components, especially in the last three weeks, so let’s talk about some of the broader points and then we’ll paint the picture.
1) Fourth quarter triple-expiration. Next Friday, December 17, is final expiration for the year for commodity, index futures, and options. Many people underestimate or don’t understand the impact of expirations in general, particularly options, but a triple-expiration (quarterly) is always a big deal. Being the end of the year, a lot of hedge fund money will be playing out their endgames leading up to expiration.
2) End of year tax considerations. The last possible trading day of the year, even if it is December 31 during the week, is a full trading day. This was originally done because the exchanges needed to make sure everyone had a full day to close their positions for the year. In today’s world, it is unnecessary (if Christmas Day is a Thursday, we get Thursday off and a half day Wednesday, but not the same for New Year’s). Still, regular rules apply. Stocks that are up a lot for theĀ  year tend to keep rising into the end of the year because the sellers don’t want to lock in the tax gain until 2011.
3) Vacations. People tend to take them starting December 23rd. Some last through the 26th, some last through the end of the year.
This year, the last day of the month is Friday the 31st, so we have exactly three weeks left. Let’s go through how they will likely play out.
Week of December 13-17. Next week should really be more interesting than the last two. Hannukah is behind us, which often slows down volume for a bit. This will be the week of triple expiration. That means a lot of position unraveling will occur between Tuesday and Thursday, with one of those days (statistically, Wednesday) seeing the biggest range of the week because of it. We also have the last Fed rate announcement of the year on Tuesday (so Tuesday could be a little light, and everything gets packed into Wednesday and Thursday); INSERT INTO `wp_posts` (`ID`, `post_author`, `post_date`, `post_date_gmt`, `post_content`, `post_title`, `post_category`, `post_excerpt`, `post_status`, `comment_status`, `ping_status`, `post_password`, `post_name`, `to_ping`, `pinged`, `post_modified`, `post_modified_gmt`, `post_content_filtered`, `post_parent`, `guid`, `menu_order`, `post_type`, `post_mime_type`, `comment_count`) VALUES plus CPI, PPI, Industrial Production, Capacity Utilization, Philly Fed, and Leading Indicators, just to name a few. I know that I will be paying a lot of attention on Wednesday and Thursday in particular. Friday will see a lot of volume, but probably not much movement, as options and everything expire near their strikes.
Week of December 20-24. This is where things start to slow down. All of the economic data for the week is coming out Wednesday and Thursday, but none of it are critical numbers. Monday will be a dud as it is the first day of a new options cycle. If there is a high point to the week, expect it to be Wednesday. People start to head out Thursday. Since Christmas Day is Saturday this year, we get the whole day off Friday (Christmas Eve). In a lot of ways, I would expect Wednesday, December 22, to be the last day of the year that retail traders make “position decisions.” Then they head out for the Holiday.
Week of December 27-31. The last day of the year typically sees a 20% drop in volume on average. A lot of professionals take it off. At best, you should expect to play “hit and run” in the first 60-90 minutes. Our analysts don’t always come back for the second half of the day. This is also where end of month, end of quarter, and end of year “window dressing” takes place. The funds already have their positions to show and their stocks in place where they want them. They don’t let them move much, and there isn’t enough retail activity to make that happen.
That should help you plan a trading road map for the rest of the year. Obviously, anything can happen, but that’s the most typical expectation.
By the way, since New Year’s is Saturday, January 1, and the stock market has to be open in full on December 31 (Friday); INSERT INTO `wp_posts` (`ID`, `post_author`, `post_date`, `post_date_gmt`, `post_content`, `post_title`, `post_category`, `post_excerpt`, `post_status`, `comment_status`, `ping_status`, `post_password`, `post_name`, `to_ping`, `pinged`, `post_modified`, `post_modified_gmt`, `post_content_filtered`, `post_parent`, `guid`, `menu_order`, `post_type`, `post_mime_type`, `comment_count`) VALUES even though no one shows up, there is NO OFFICIAL stock market Holiday for New Year’s Day this year. The stock market is open on Monday. However, banks are not, so it will be a dud first trading day of 2011. And in a later Blog, we’ll discuss the “first three trading days of the year phenomenon.”