The Turkey Effect on Today's Markets

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. Nobody is certain why. 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.

Historical evidence

I don't know the reason, but what I do know is that it certainly is no coincidence. According to a CXO Advisory Group web article, 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 returns even more remarkable is that it is a half-day session. (US equity markets close at 1pm ET.)

We need to look no further than Wednesday's market action for confirmation of the Turkey Effect. The S&P 500 was up 3.5%, and I don't think it's unreasonable to expect a similar day on Friday. So, how can we best profit from it?

If you don't trade index futures, try options

You can play the index tracking stocks, such as QQQQ (Nasdaq 100), SPY (S&P 500), or DIA (Dow Industrials) but to get the most bang for your buck, I recommend 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. The chart below shows today's returns on candidate options.

The 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 reverse direction, don't get burned. Options need a bit more "wiggle" room than stocks, so I'd recommend placing a sell order if it drops below 20% of the purchase price.

Stock versus options returns
Wednesday, the Q's gained 4.2%, the SPY gained 3.9%, and the DIA was up 2.8%. If instead you had bought the options, your return would have been magnified more than ten times!

Summary

So, 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!

Note: Do not trade options if you've never done so!

Comments

[je:]

On the Q's: from the last low to high the 61.8% Fib level comes in at 28.25.This is also about where the mean of the Bollinger Bands is on an hourly chart (which seems to be working pretty good these days). This is also and area of support and resistance from the 24th to the 26th.

This seems to be a good confluence of indicators to consider an entry.

10:15 to 10:45 ???

2008 Nov 28 08:36 AM

[je:]

I forgot to mention that the 1.272% extension, which is acommon target is 29.99

2008 Nov 28 08:49 AM

[veryold:]

But, how can one learn how to do options?

2008 Nov 28 11:17 AM

[JOETRADER:]

On Nov 28 11:17 AM veryold wrote:

> But, how can one learn how to do options?

YOU MIGHT TRY WWW.CBOE.COM

2008 Nov 28 11:57 AM

[JOETRADER:]

On Nov 28 11:17 AM veryold wrote:

> But, how can one learn how to do options?

TRY WWW.CBOE.COM

2008 Nov 28 11:58 AM

[je:]

very old
Why don't you try Yahoo finance to start. Th eCBOE stuff reads to legalistic for good understanding. In Yahoo they have some information under the investing tab or if you prefer here is the options tutorial page (biz.yahoo.com/opt/basi...)

The options can be found in the legend on the left hand side of Yahoo after you enter a stock.

If I was you I woud just practice on paper for awhile before you try the real thing. Options ar every volatile and you need a good stomach for it. A good entry helps eliminate some of that.

As I described above and as Kris stated that we are both looking for a bit of a pullback in price before entering the trade. It did not happen today. It might not happen to the Q's period so it helps if track more than one stock for an entry.

The Q's bid and ask trade very close as a rule so the small spread between would limit your losses if you decided that you wanted to bail out. Some people say to use a time frame vs price action, others says if it moves against you bail right away. You will have to consider those things and develop your own style. Tech analysis is a must, at least I believe it is, to having sucess at options. If you are new that includes Fibonacci retracements and extensions, chart patterns, candle sticks. moving averages, Bollinger bands, and all the others that you can get a grip on and touse different time frames to help decide the overall outlook. It seems to be an on going learning experience to develop these skills and react to the "probabilities" that all of this analysis presents.

2008 Nov 28 04:38 PM