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The Trick for Year-End-Trading
The year-end is often one of the most boring periods in the financial market. The market volume has been relatively low and price movement can be considered nonexistent due to investors consolidating their portfolios and strategizing for the future. Unless it is a really newsworthy story, there isn’t much to watch or read.
Nevertheless, this calming trading period can provide a great opportunity for traders to take advantage of the market.
For investors, it is essential to rebalance their portfolios. It gives investors a better outlook on which investments have performed well and which are not. Their decision on portfolio balancing can be impacting one company’s stock price.
If the share price of the company that the investor invested in experienced a particularly strong uplift over the period, it may trigger the decision to take profit on those trades. It will lead the investor to sell the shares and push down the company’s share price and vice versa.
In the final months of the tax year, many investors tend to sell stocks that have declined in value. It allows them to claim capital losses as tax deductions. This movement tends to push certain share prices temporarily.
If a share price of a company experience a sharp fall, investor tend to determine it as an undervalue stock and decide to purchase it while the prices are still cheap.
In December, there is an investment period known as the ‘Santa Rally’ where stocks rally a few days before Christmas. Historically, stocks tend to do well before Christmas. However, right after Christmas, most stocks tend to slow down by low volumes since most investors tend to go on holiday and hit right back on the first 2 trading days of the new year.
Exactly why does the 'Santa Rally' take place?
It mainly occurs due to investors and traders will start taking year-end position adjustments a week before Christmas long holiday while the market is still in high liquidity. Some investors tend to invest their extra holiday bonuses induced by this rally.
Some other theories around the Christmas/holiday spirit are that retail investors took some capital gains to buy better Christmas gifts for their partners and families. On the other hand, some investment enthusiasts can purchase stocks as Christmas gifts for their beloved ones.
Another reason will be, it is the time of year when institutional investors go on vacation and leave the playground to retail investors, who tend to be more bullish.
Out of the 20 years, the market rallied 13 times. A total of 65% chance of the rally to replicate from one year to another. The impact of Santa Rally not only impacts the US stock market but across other investment mediums such as real estate, bonds, and commodities.
Between Christmas and New Year, most financial market participants are expected to be taking a holiday break, creating a quiet rally a few days before the new year.
** It might be hard to assume that Bitcoin will replicate the flow this year as (at the time of writing) BTC has hit the $16,000 mark, which is a significant low compared to its peak of approximately $69,000 in 2021
As for Forex investor, the forex market trades normally and does not effect by the ‘Santa Rally’ which indicate that there is no special indicator occurring during this period.
On the other hand, many investors consider the Santa Rally as a result of people buying stocks with anticipation of another stock rally wave in January or also known as the ‘January Effect.
The January Effect.
Many investors believe that a rise in the stock market in January will carry over to the whole year, as the quote suggests.
So, what is January Effect?
It is believed that the stock market tends to rise in January more than any other month after stagnating during the final week of December. There are many factors contributing to the effect such as:
Tax-loss harvesting. It is when investors re-enter the market after selling off some of the stocks during year-end in order to lock their losses for tax purposes and repurchase them in January. The action of a major sell-off will cost the stock price to drop and repurchasing will escalate back the stock’s price. Other contributing factors are investing in excess year-end bonuses in January, the new-year resolution to invest, and many more.
However, seasonal investing is not always promising. For example, on the first trading day of 2021, the S&P 500 dipped 1.5% to 3,700.65 while on the other hand, the S&P 500 was up 0.6% on January 3, 2022.
It can be tricky, as a result of Covid’s impact on the market and vaccination, the market might still be shaky in January 2021. However, as this is getting betting into the hand of most companies, January 2022 offer a brighter prospect. For example, on the first trading day in 2022, Apple Inc hit an intraday high of $182.88 and become the first company to hit $3T stock market value before the end of the day.
As the year winds down, you may want to exit positions, take a break, and have a rest. Invest this time in gaining more knowledge and building your strategies. Come together with other investors to choose new investments to start the year off on the right foot.
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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.