January Mid Month Break

This is a seasonal trading strategy based upon an idea from the Stock Trader’s Almanac. It is based upon the stock market’s tendency to retreat after the New Year – especially if there has been a strong fourth quarter. Almanac attributes this trend to profit taking. This also follows another seasonal idea – bullish Santa Claus Rally – at the year end. So, the profit taking argument has some merit making it a potential seasonal setup to trade.

Although this idea has worked for a longer time, the editors at the Almanac have noticed a more pronounced and consistent trend since 1996.

Our back testing – from 1983 to 2011 – of this trading strategy has produced 52% success rate, whereas the Almanac claims 55.2% success rate. Clearly, there is some discrepancy in our application of the idea and theirs. Our success rate since 1996 is 68.75%, same as that for Almanac.

Also, when we applied one of our variances of the entry-exit criteria then the success rate and average gains per trade improve significantly.

The original idea goes short – S&P 500 – on or about the second trading day of January and holds it for close to 12 trading days.

Our modified strategy goes short S&P500 on 10-Day high close between the second and fifth trading day of January and exits the trade on the 14th trading day of January. If the entry criterion is not met within the stipulated time period then the trade is skipped that year.

Below is the hypothetical results of this strategy applied on the SPY (short) – SPDR S&P 500 Trust – since 1996. We have used a $10,000 starting amount and the gains/loss have been added for the next trade. The results do not include commission and other expenses.

Original Strategy Modified Strategy
Net Profit $2,627 $2,439
Return 26% 24%
# of Trades 17 12
Win % 65% 75%
Avg. Per Trade $155 $203
Avg. Ret (Per Trade) 1.4% 1.8%
Avg. Win $385 $349
Avg. Loss $(268) $(234)
Max Draw Down (4)% (4)%
Avg. Trading Days Held 12 12
Total Trading Days Held 204 142
Avg. Calendar Days Held 18 18
Total Calendar Days Held 303 211
% of Time Invested 5.0% 3.5%

Notice that the modified strategy is invested only 3.5% of the times with 24% return. The annualized comparison – if you can deploy such a strategy for a full year – would be a return of 685% – pretty impressive.

Here is how these hypothetical trades would have been since 1996 for the modified strategy:

Entry Date Entry Price Exit Date Exit Price Net
03-Jan-96 61.98 19-Jan-96 60.94 167
05-Jan-98 97.26 22-Jan-98 95.57 172
05-Jan-99 123.96 22-Jan-99 121.91 164
03-Jan-01 134.28 22-Jan-01 134.19 7
03-Jan-02 116.22 22-Jan-02 111.77 383
03-Jan-03 90.86 22-Jan-03 87.70 348
05-Jan-04 114.84 22-Jan-04 114.19 (209)
04-Jan-06 127.30 23-Jan-06 126.42 69
06-Jan-09 93.47 22-Jan-09 82.75 1,136
05-Jan-10 113.63 22-Jan-10 109.21 389
05-Jan-11 127.64 21-Jan-11 128.37 (57)
04-Jan-12 127.70 23-Jan-12 131.61 (305)

Instead of using SPY one can also use the Proshare ultra short etf – SDS.

The Fine Print: Before employing this strategy in your live account please understand the rationale behind this seasonality pattern. Then run some back tests for the trade start-date and holding periods. Make sure that the risk level, max draw down, win ratio and average loss falls within your comfort zone and that you can withstand the draw down and the associated risk. Also read our disclaimer.

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