Stocking up for Christmas
With Christmas around the corner, I always get excited. Why? Because it's money-making time in the stock markets! It's the time of the year when I can go out and buy presents for friends and family knowing that the markets will pay for everything. I pretty much do the same thing year in year out: buy shares in mid December, and flog them at a profit before January is out.
Why? Because even though it's cold outside most years, the December and January markets are hot!
The statistics support my argument: the strongest week of the year for the market is the 51st week. And the second strongest? The 52nd week! The third strongest day of the year also falls in December: the 16th, the fourth strongest: December 28th and the fifth: December 23rd.The probability of positive returns in December is a high 69% and the market's only had one significant fall in December since 1981. Both mid and large cap stocks perform equally well.
Why are the markets so good at this time of year? I suspect it is down to something as simple as human psychology: the feel good factor as Christmas approaches and the hopes and dreams that comes with the New Year. However, by the end of January we tend to be left with a bit of a hangover and that's why February isn't such a good month. The markets also often fall in October and November as investors begin to come in and buy what they perceive as bargains.
So where do I put my money to make the most of the benign conditions? First of all, and I do this every year: I buy the FTSE 100 around December 18th and I sell in early January to take advantage. I usually just make a simple FTSE 100 spreadbet long, with a stop loss in place in case it's the one occasional year when the festive uplift doesn't happen.
For example: last year I bought the FTSE at 5495 on December 15th and sold on January 12th at 5735 for an excellent profit of 240 points. I'd placed a £10 a point stake which resulted in a nice profit of £2,400.
I also like buying retail stocks in December. These stocks often rise quite a while before (and just after) Christmas in anticipation of high consumer spending. I'm normally out by early January as retailers usually report their Christmas figures in mid January and sometimes the reality isn't so good. Alternatively, the stocks could already have risen in anticipation of good figures so they begin to fall back on profit-taking.
I also find that December is a good time to have a look at some of the smaller "tiddler" stocks in the market and have a bit of a gamble.
On the downside, one thing to watch out for is companies sneaking out bad news between Christmas and New Year - it's the same as political parties hiding bad news on a big news story day. With so many people away, the companies hope the bad news will go unnoticed so it's worth keeping an eye on news related to your stocks. I tend to get out quick if any kind of bad news is released during the festive period.
The period between Christmas and New Year often sees stocks squeezing higher on thin volumes and this year I intend to be at my screen hoping to make some good gains in just a few days. The market is only open for three days during the main festive period this year: December 27th, 28th and 29th. Even though I might well be tucking into mince pies I'm still going to be at my trading desk looking out for opportunities to make some money!
Last year many stocks raced higher during the holiday period as often there is simply no-one selling and the institutions are shut. This often has a good effect on stocks at the smaller end of the market.
Of course I am making it all sound too easy... this could be the year that it doesn't work out - events could get in my way. But the use of tight stop losses should ensure that if 2006 does not prove to be a bumper Christmas then I won't lose too much after all.
I should also point out that markets often don't do what you expect - so what I write here should really come with a warning. I certainly would not buy before Christmas, go away and come back in January.
My eyes will continue to monitor the market throughout the festive season. But unless unforeseen political or economic events cause the markets to go through an unseasonable lull, I expect to be buying heavily this Christmas season and hoping the markets will once again pay off that whopping credit card bill, which as usual will land on my doormat in February!