Tuesday, Nov 28
Does the "Santa Rally" really exist?
Each year the financial markets begin talking up the ‘Santa Rally’ as we approach the end of the year. It’s hard to argue that this phenomenon does not exist, as over the course of history the numbers really do speak for themselves. The more people discuss this and read about these seemingly free returns in the stock market, the more chance there is of it being a reality. It could be argued that in fact what this is doing is creating a self-fulfilling prophecy among investors. By taking a snapshot of the gains seen over the last 10 years in the UK equity market between December 1st to December 31st, it is clear to see there is upside to be had by believing in Santa Claus.
This year we are looking at returns from December 1st to December 31st and look for the ideal entry point on the FTSE100. The table above shows the average return from the FTSE100 is 1.99%. This appears a no-brainer when displayed in such a way as above, but trading this period in the stock market is far from plain sailing. Looking at the highs and lows during these periods and understanding the potential for large swings in the market is very important. There is no such thing as a free lunch and to have made these returns over the last 10 years, there certainly would have been some periods where investors will have been sweating over whether they are doing the right thing.
Below is a table of the percentage swings from high to low between November and December over the past 10 years:
The table suggests that from the first trading day of December until the last trading day of December there is a swing from high to low of 6.67% on average over the last 10 years. That is quite some move, and something investors who are positioning themselves for a Santa Rally should be aware of. 2008 is clearly the stand out number with a move of 10.84%. Even if we remove this outlier from the average, the average move in this period is still 6.21%. Based on these averages, buying early in anticipation of a ‘Santa Rally’ may not be the optimal point of entry. It could be argued that attempting to buy a fall in prices of around 3% after the first day in December could further increase investor’s chances of returns. This also raises the possibility of no entry into the trade at all if a drop fails to materialize.
Average Drawdown in December from the 1st trading day to the low of the month.
What should we be asking Santa for this year?
We have looked at the seasonal returns of all the stocks in the FTSE 100 over the past 10 years. The table below highlights the best and worst performing stocks over the past 10 years on an average basis between December 1st to December 31st.
The best performers – this is the top 15 returning stocks in December over the past 10 years with a win rate of 70% or above.
Ashtead Group & WPP boast 100% records in December over the past 10 years, while Paddy Power Betfair & ITV have had only 1 negative December since 2007.
Not only have these stocks performed historically well in December, but collectively also very well against the FTSE 100 over the past 12 months. On an equal- weight basis, the stocks have returned 24.3% versus the FTSE100 return of 13.2% since November 23rd, 2016.
The worst performers – this is the bottom 15 returning stocks in December over the past 10 years with a win rate of 50% or below.
Marks & Spencer has consistently performed poorly in December with on 2 up Decembers since 2007 and an average return of -3.23%. HSBC & Anglo American have only produced 3 positive Decembers since 2007.
Not only have these stocks performed historically poorly in December, but
collectively also against the FTSE 100 over the past 12 months. On an equal-weight basis, the stocks have returned 9.6% versus the FTSE100
return of 13.2% since November 23rd, 2016.
Some may be surprised by the lists above, but over the past 10 years, there are some consistent out and underperforming sectors in the market.
This should not be ignored and should be used by investors to tactically pick areas of the market to produce the best returns in the November to December period.
So once armed with these stats we can further drill down into individual stocks and attempt to further enhance gains this festive period. Taking the information above we have compiled a ‘Naughty’ and ‘Nice’ list that investors should be looking at.
We have devised this list by considering historic returns during this period of the year; the technical setup based on the chart patterns and finally have run the stocks through our internal fundamental ranking system.
What we are left with is our favourite top 5 buys and sells for the move into the last trading month of 2017. This is the list of stocks that have made it on to the ‘Nice’ list; we expect outperformance going into year-end based on many factors.
We have limited our search to stocks that are within the sectors mentioned above, then we have looked at the 10-year average return in December, and finally, the stocks score within our fundamental model.
SCQ = Sequant Capital Quantitative Model Score (This ranks stocks based on a number of fundamental factors) Lower scores are best.
The stocks in the above list all rank within the top 33% of our fundamental model. There is a risk by following this strategy of concentrating too much capital in too few sectors, and this is something investors must be mindful of.
The chart below shows the 5 stocks in the ‘Nice List’s’ combined returns since January 1st, 2017:
White – Equal weighted basket of stocks in the ‘Nice’ list since January 1st, 2017
Orange – FTSE100 Return since January 1st, 2017
Green – The ratio between the 2 above lines – 12.3% out-performance as of 23/11/17
We see a high probability of continued out-performance versus the FTSE 100 in the final month of the year from these stocks. We believe that these stocks could be a great addition to any investors portfolio in the lead up to Christmas.