New Year's Day Wager

The S&P 500 data for the Santa Claus rally provided an opportunity to look at another supposition. I assume some people will sell at the end of the year for tax purposes. I also assume that some people will buy early the next year to establish positions. So is it worth buying at the close of a year and selling early to following year?

The S&P 500 went up 61% of the time on the first trading day of the New Year (over the previous days close). The average overall gain was 0.6%. The average gain was 2.1% in the positive years, while the average loss was 1.7% in the negative years.

I also looked at the second trading day’s changes. When the first day was up, the second day went down 56% of the time. When the first day was down, the second day went up 68% of the time. So following are the steps in the New Year’s wager.

• Buy the SPY ETF at the close on New Year’s Eve.
• If the market is up the next day, sell for profit.
• If not, sell the on the following trading day.
• There is a 13% chance it will be down again (take the loss).

Since New Year’s Day is on a Thursday this year there will only one trading day before the weekend.  This has happened nine previous times since 1950. Seven times the wager succeeded on Friday. The other two times it succeeded by waiting until Monday.