Sent: 11-12-2012 08:57:02
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Getting Ready for Another Christmas Effect
As the end of the year rapidly approaches, excited children begin to think about the "Christmas effect" in the market for small resource stocks.
There is a marked seasonal effect in the pricing of Australian small cap mining equities. The 3.1% average return in the S&P/ASX small resources equity price index in the month of December over the past 12 years has been more than double the 1.2% overall average monthly return. There have only been two occasions in which the December return has been negative in the past 12 years while nearly half of all monthly returns have been negative since 2000.
A disproportionate part of this seasonal effect occurs at the very end of the year - between Christmas and the last trading day of the year. In the last 12 years, the average return over this period has been 2.6% with only one instance of a negative outcome. The only negative return was in 2011 but even that could have been avoided if the holding period was extended to 14 January.
Between Christmas and 14 January, the average return from this segment of the market over the past 12 years has been 4.8%. Over the period from Christmas 2011 to January 2012 the return was 4.2%.
For those sceptics who do not believe in Santa Claus, there is something slightly weird going on here. Proper markets should not be behaving like this.
Window dressing - fund managers buying at the tail end of the year to support calendar year performance statistics - could be a factor. If that was happening, however, the converse should also be at work. Other fund managers should be selling into this patch of strength to boost their performance vis-à-vis that of their competitors and buying in June, for example, when a negative average monthly return has seen a loss of value in nine of the last 12 years, including all seven of the last seven years.
The chance to trade around these seasonal effects seems to have been largely ignored.
Liquidity could be a constraint on how aggressively traders respond. The approaching holiday season might also be having a practical effect. Traders might be inclined to square off positions as the Christmas holiday period approaches, especially those looking to sell stock.
Once that selling has been done and trading volumes subside with the onset of Christmas, even modest amounts of buying, without any intent to push up prices, could have disproportionate effects by the standards of other times of the year.
Positive price momentum usually attracts others, not least in this market segment. The resulting demand infusion would probably keep the price momentum going a little longer into the first part of the new calendar year.
The unique significance and duration of the summer holiday might mitigate against the elimination of this Christmas trading effect.
Of course, publicising this apparent market aberration makes its repetition less likely. Those nimble enough to successfully take advantage of this trading insight will not only benefit personally but will make a wider social contribution as they help foster a more efficient Australian equity market.
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