Now is the time to buy US stocks

According to Jeff Hirsch’s Stock Trader’s Almanac now is the time to buy US stock indices as we enter a bullish seasonal pattern today.

By analysing data going back to 1950 Mr Hirsch shows that the November-to-January time frame is the year’s best consecutive three-month span to hold stocks.

Thanksgiving kicks off this seasonal stock outperformance, followed by the “Santa Claus Rally” which covers the last five trading days of the year and the first two of the New Year, and the “January Effect” of small caps outperforming large caps in January, which begins in mid-December.

Mr Hirsch and his friend Larry McMillan of the Options Strategist have combined “these seasonal occurrences into a single trade: buy the Tuesday before Thanksgiving and hold until the 2nd trading day of the New Year.” Apparently when trading this strategy with options the best day to do so is on the day before Thanksgiving.

Since 1950, the S&P 500 is up 79.45% of the time from the Tuesday before Thanksgiving to the 2nd trading day of the year with an average gain of 2.57%. The Russell 2000 is up 77.27% of the time since 1979 with an average gain of 3.19%.

Thanksgiving - Santa Claus Rally Trading statistics

There is an important caveat to the “Santa Claus Rally” though, coined by its 1972 inventor Yale Hirsch’s phrase: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

The “Santa Claus Rally” in the current market context

When looking at the above strategy in the current context one shouldn’t be surprised if equity indices on both sides of the pond may at least short-term consolidate as liquidity dries up around the prolonged Thanksgiving weekend.

After all, with US indices having strongly risen from their late-October lows - by between 8% and 14% in little over three weeks – and looking technically overbought, a minor correction over the coming days shouldn’t come as a surprise.

Having said that, such a counter-trend move might represent an even better stock buying opportunity for the above mentioned strategy, especially since the last few days of November tend to lead to stock market gains.

Best month of the year chart