The significance of this is that while almost everyone knows about the "Santa Claus" rally and that December is usually a positive return month, far fewer are aware that there are two distinct December periods. These are the "Last Seven Trading Days" period, and the "Early December" period.
As measured from 1928 through 2009, the average and median returns for these two periods are dramatically different. Here are the basics for those 82 years worth of Decembers:
|Last 7 |
Trading Days of
|Mean||1928 to 2009, inclusive||0.19%||1.23%||1.41%|
|Median||1928 to 2009, inclusive||0.65%||1.04%||1.55%|
|% # Up||1928 to 2009, inclusive||59.8%||81.5%||65.4%|
Okay, so now we see that the really good time to be long in December is the last few days. As with an infomercial, “But wait, there’s more”. The results also vary dramatically depending upon whether the “Early December” shows a gain or a loss.
Basically, in years when the “Early December” period shows a loss (40.2% of the time), the market does significantly better than average for the “Last 7 Trading Days” period. There tends to be a very large surge in the last few days which, on average, dramatically reduces the loss for the month. Here’s the numbers:
|Results When |
Shows a Loss
|Mean||1928 to 2009, inclusive||-2.87%||1.87%||-1.06%|
|Median||1928 to 2009, inclusive||-1.77%||1.57%||-0.28%|
|% # Up||1928 to 2009, inclusive||0.0%||84.8%||45.5%|
“And that’s not all”. Perhaps not surprisingly, the opposite is seen in years when “Early December” shows a gain. In those years the results for the “Last 7 Trading Days” period, while still positive on average, are quite muted.
However, note in the table below that it is the size of the gain (both average and median) that is much smaller. The frequency of positive results for the “Last 7 Trading Days” period is only slightly less than that for all years or for years when the “Early December” period showed a loss.
|Results When |
Shows a Gain
|Mean||1928 to 2009, inclusive||2.25%||0.79%||3.06%|
|Median||1928 to 2009, inclusive||1.92%||0.65%||2.77%|
|% # Up||1928 to 2009, inclusive||100.0%||77.6%||91.8%|
The “Last 7 Trading Days” period also shows positive results whether we are in the midst of a Secular Bull market or a Secular Bear market. The conclusion: the market is highly likely to advance from December 22nd through December 31st and to finish a strong year on a positive note.
So it would seem that history is predicting a strong finish to 2010 based on some historical analysis, but what to do with 2011 right around the corner? According to our research, technology is where you will want to be moving to after the New Year.
Since 1972, the S&P 500 Technology sector has outperformed the S&P 500 in January 68% of the time, by an average of 230 basis points (2.3%). Tech is also the strongest performing sector in the month of January.
If we look at a breakdown of the Tech sector, Ned Davis Research tells us that certain sub-industries tend to outperform others within the sector. Here is a breakdown of the sub-industries within the Tech sector that produce the highest average excess return in January:
- Computer Storage & Peripherals: +750 basis points.
- Semiconductor Equipment: +660 basis points.
- Semiconductor Manufacturers: +530 basis points.
- Systems Software: +400 basis points.
There are a couple of different ways to give your portfolio some exposure to technology. One way would be the old fashioned way - purchasing individual stocks in order to gain exposure to the different areas of the sector. For example, you could purchase TriQuint Semiconductor Inc (TQNT) for exposure to the Semiconductor Manufacturers sub-industry, Rovi Corp (ROVI) for exposure to the Systems Software sub-industry, Sandisk Corp (SNDK) for exposure to the Computer Storage & Peripherals sub-industry, etc, etc.
You could also utilize exchange traded funds (ETFs) to gain exposure to the tech sector at large, or pick up a few ETFs that track certain sub-industries of technology. By utilizing ETFs, you can smooth out your returns and avoid company-specific volatility (remember though, volatility exists both ways!). If you’re looking for broad exposure to the tech sector, we like the SPDR Technology (XLK), and iShares Technology (IYW).
If you’re looking to diversify across the sector, you can invest in ETFs that track certain areas, such as semiconductors (XSD), or software (SWH). Click here for a full list of Technology ETFs, courtesy of stock-encyclopedia.com.
It’s worth noting that there are also double and triple leveraged tech ETFs, for all of the risk-takers out there. We like the ProShares Ultra Tech (ROM), and the ProShares Ultra Semiconductors (USD). Leveraged ETFs are marked with an image symbol next to the name on the list found by clicking the link in the previous paragraph.
There are countless ways to invest in tech this holiday season, but if you’ve read this far, I’m sure you’re looking for some advice on which area of the Tech sector we think has the most potential. I run a personal equity portfolio outside of the TSP portfolios you see on the site, and just this afternoon I bought shares of SPDR Semiconductor (XSD) in anticipation of (what I hope is) a strong January month for semis. Here are a couple of points to show where I’m coming from:
- Semiconductors have been a laggard behind stronger intra-sector industries like Software and Services and IT Consulting & Services. Semis have pulled back, offering a very attractive buy point from a technical perspective. It’s easier to buy a stock on a pullback than it is at its intra-year highs, and a lot of tech is already off to the moon (Rovi Corp. (ROVI), ACI Worldwide (ACIW), Apple (AAPL), etc.).
- Ned Davis Research, one of the nation’s top institutional research firms, upgraded the Semiconductor Manufacturers and Semiconductor Equipment sub-industries to their “Recommended List,” noting that both industries are oversold and sentiment is washed out. This implies that semi stocks are undervalued, and investors will most likely jump on the pulled-back semi stocks if they’re looking for tech exposure, rather than chase stocks that have already run up.
Disclosure: No positions