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Wall Street Week Ahead – Market Indicator for November 21, 2011
Trading Thanksgiving



In the Week Ahead on Wall Street the Turkey, or Thanksgiving, Effect will Provide Compelling Reasons to Trade for Profit!



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the week ahead market indicator

The Turkey, or Thanksgiving, Effect is a well-documented stock market phenomenon whereby the market is unusually bullish both the day before and the day after Thanksgiving. There is no clear-cut reason why this occurs but several theories do exist:-

• Maybe people are overly-optimistic because they're in a holiday mood, or

• Perhaps the big dogs on Wall Street split early and leave trading in junior hands, or

• The emotional/psychological aspect steps up and feelings surrounding Thanksgiving Day takes center stage! After all, we have to remember that the stock market is not a living breathing entity unto itself. Rather, the stock market is a place where people—investors—gather to exchange stocks. It is the people who are important, and people are emotional creatures. Typically, people who are happy are more optimistic about the future, and this leads stock investors to be more optimistic about the future of the stocks they are interested in—which usually lead to price increases.

Historical Evidence

In looking at the US Thanksgiving stock market returns for the last 50 years there seems to be a positive effect noted, the effect is slightly less persistent during the last 30 years, but still seems to be positive.

According to statistics, the day just before Thanksgiving (T-1) and the day after Thanksgiving (T+1) posted significantly higher returns. Return data collected from 1950-2006 showed T-1 days averaging about 0.37% and T+1 days averaging around 0.39%. These numbers look small but they're roughly ten times the average daily return during that period!

Since 1990, however, the returns have been smaller: about 0.19% for T-1 and 0.22% for T+1 with the standard deviation of T+1 being the smaller of the two and within reasonable limits. What makes the T+1 return even more remarkable is that it is a half-day session. (US equity markets close at 1pm ET.)

Thanksgiving, in the week ahead, will probably provide some pretty low volumes. But what kinds of returns are typical during the four-day trading week? Let's observe how the market has performed during past Thanksgiving weeks since the Year 2000.

Thanksgiving Week since 2000

Below is a table showing how the S&P 500 Index (SPX) fared each day of Thanksgiving week since 2000. The entire week has averaged an impressive 1.3% return, with 64% of them positive. For comparison, the average return for any week since 2000 is pretty much flat, with barely half of them positive. However, the Thanksgiving week returns are boosted by one huge 12% jump in 2008.

It has been typical for Thanksgiving week to get off to a good start. Monday has historically been the best session of the holiday week, averaging a return of 0.74%. Tuesday looks to be a very quiet day; only two times in the past 11 years has this day netted a return of more than 1% in either direction (2010 was one of those years). Tuesday is also the only trading day of the week that averages a loss.

SPX - Thanksgiving Week Returns



By observing the historical global stock market performance from Thanksgiving to New Year's Eve, on average, the Dow Jones Industrial Average (DJIA) returns 1.9% during the period and posts positive returns 79% of the time. Furthermore, when the Dow is positive for the year up to Thanksgiving, it returns 3.4% on average with positive returns 82% of the time.

Thanksgiving Stocks for the Week Ahead

So, which stocks typically do well during Thanksgiving week? Below are 20 stocks that would have served your portfolio well during Thanksgiving week over the last 10 years. The first five stocks in the table have been positive every single year during the week of Thanksgiving. The rest of the table includes stocks with the highest average returns that have seen only one down year over the last decade.

There are no turkey producers on the list -- but I do notice quite a few retail names. Maybe investors are buying stocks expected to have a strong Christmas season?

Stocks during Thanksgiving Week



Trading Strategies in the Week Ahead on Wall Street

Investors can make use of notable seasonal patterns, such as Thanksgiving Day, in the week ahead, when trading stocks. They can improve entry prices and exit prices. However, none of these patterns can be said to be bulletproof so take care as usual!

Trading Index Futures or Options

One play, for the week ahead, is to buy index tracking stocks, such as the the Nasdaq 100, as represented by the Powershares QQQ ETF (Nasdaq: QQQ) ETF, the SPDR S&P 500 ETF (NYSE: SPY), the iShares Russell 2000 Index (NYSE: RUT) or the Diamonds Trust, Series 1 (NYSE: DIA) ETF. However, to make the most of your investment money in the week ahead is to buy the December at-the-money (ATM) calls. The options fields for all of these tracking stocks are generally much more liquid (and cheaper) than their index options.

One way to play these on Friday is to buy 10-15 minutes after the open (often the market slumps right after the open) and sell right before the close. You can place limit orders but make sure you're out of your positions before the close as you don't want to get stuck holding them over the weekend. (If nobody's biting at your limit order, change it to a market order.)

If the market does the unthinkable and reverses direction in the week ahead, don't get burned. Options need a bit more "wiggle" room than stocks, so place a sell order if it drops below 20% of the purchase price.

Stock versus Options Returns in the Week Ahead

Usually, if you buy options, your return would have been magnified more significantly then if you had purchased index stock!

An Alternative Play for the Week Ahead

Another profitable strategy for the week ahead would be to go long on Tuesday close and to close out that position during the short trading day on Friday. A potential trade would be to short the market over the weekend and to close that position at the start of the trading day on Monday.

Summary

Therefore, instead of charging off to the mall Black Friday morning, stay home and buy some index options. You only have to wait three and half hours to pick up your paycheck. The stores will still be there and hopefully you'll have a lot more money in your pocket to buy that flat-screen TV and spread some holiday cheer.

Happy Thanksgiving!

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