December marks the holiday season, with many celebrating Christmas, Hanukkah, Kwanzaa and New Year’s Eve.
It also seems like a time to celebrate on Wall Street. December is the most bullish month of the year.
The S&P 500 Index has ended the month higher 74% of the time since 1929. That’s the best winning percentage of any month over that time.
Based on the winning percentage, April is a distant second with 66% winners.
Both months are far better than average. Using a random entry, the S&P 500 is up in a month 58.1% of the time.
Digging deeper, we see a few seasonal trends in December. There’s even an ideal time to buy during the month.
Seasonal Patterns Reveal the Best Time to Buy
The chart below breaks the month down by days for the SPDR S&P 500 ETF Trust (NYSE: SPY).
In a typical year, the SPY exchange-traded fund (ETF) starts with a brief rally and sells off into the middle of the month. In the last two weeks, the index makes a substantial move higher.
December Seasonals for SPY
Seasonal trends are often generalized, but each index or stock also has its own trend.
In the next chart, the Invesco QQQ Trust (Nasdaq: QQQ) is shown.
This ETF also has a strong rally in the first few days of December. This rally is tradable by short-term traders.
Then, there’s often a steep decline followed by a rally into the end of the month.
December Seasonals for QQQ
QQQ provides at least three trading opportunities in December.
For traders using options, calls can profit from short-term rallies. Put options benefit from price declines.
Options could also be profitable for small-cap stocks.
The final chart shows December seasonals for the iShares Russell 2000 ETF (NYSE: IWM), an ETF that tracks small-cap stocks.
December Seasonals for IWM
The rally that typically begins in the middle of the month is among the strongest seasonal trends in the stock market.
Expect a Dip in the Final Days of 2020
All three charts show a dip in the final days of the month.
This is most likely due to tax planning. Many investors take profits or losses to help manage their tax bills in the last week of the year.
Traders also sell at the end of the year to take profits.
There could be significant profit-taking this year, especially with a new administration taking over in 2021.
President-elect Joe Biden has threatened to raise taxes. Selling in December could help traders keep more of their gains.
That could add to this year’s seasonal tendencies.
Traders can benefit from that possibility by planning to take advantage of seasonal trends now.
Michael Carr, CMT, CFTe
Editor, One Trade