Despite the more general quarterly trend towards profits via purchase of yearlong losers, December seems to reward winners.  So, October and November give you rewards via bottom fishing, but December rewards purchases of yearlong winners.  It also punishes yearlong losers.  These trends reverse yet again in January, via the well-known "January effect".  Note that the trend toward losses in yearlong losers is strong in the second half of the month as well as the first.  Don't get trigger happy and start purchasing January effect candidates prematurely...better to wait until the last day of December (take a look at data for the last day of the year and second-to-last day of the year).

The tendency for yearlong gainers to continue to perform well in the month is easily ascribed to the desire of investors to postpone taxation of their gains...selling in the new year means these investors postpone capital gains taxes a full year.  Given this logic, however, it's important to remember that if the stock in question has a strong yearlong gain, but longer-term losses, it might still be subject to tax loss selling in December.  Not surprisingly, then, the trend toward continued gains in yearlong gainers was particularly potent in the mid and late 90's, when the major indices showed a steady upward line with no significant pullbacks.

We should also point out that buying yearlong winners at the beginning of December is not a strategy that is immune to reversal...check out 2001, 2002, and 2003.  In 2004, the group performed on a par with the market,  with yearlong losers outperforming.  The gains in yearlong losers in 2004 seemed to presage a very anomalous January 2005, where many previously reliable trends reversed.  Our conclusion:  before selecting yearlong winners for your December portfolio, look back on the previous 1-3 years and assess the various tax-avoidance strategies that are likely to be invoked.

Historically, the month gains an average of 2.2%.  The first half of the month is essentially flat, though.

Looking at our "risk-adjusted" data, another interesting December effect is that stocks with low-volatility seem to prosper more than one would ordinarily expect.  There have been a couple years where the general indexes declined in December, but these low volatility stocks gained rather nicely.  In 1997 we had a 2% loss in the general market and 4% gains with non-volatile stocks, and in 2002 the general market lost better than 6% while non-volatile stocks actually eked out 1% gains.  

This standard deviation effect is strongest in the second half of the month.  The reverse is also true in the second half of the month...despite the positive nature of the half, gains in volatile stocks are lower than might be expected.

As we've said, December tends to punish yearlong losers.  However, a nice strategy for a gain in the first half of the month is to purchase stocks that lost a good percentage on the last day of November.  Stocks with a high short-term moving average will tend to lose in the first half of December.  In general, though, the first half of the month has been a difficult time to apply a seasonal strategy to stock picking...last year's best strategy could be this year's worst. 

Another winning strategy has been to purchase stocks that have seen large increases in volume in the second half of November.

The table below identifies stocks that have strong historical tendencies toward gains or losses in December.  Stocks do seem to repeat their historical December performances.

Biotechs have fared well, especially in recent years.  On the other hand, don't expect semiconductors and their brethren to prosper...they've underperformed significantly despite the positive nature of the month. 

Broadcasting stocks tend to do well in the first half of the month.

Avoid retail stocks in both halves.  The worst of the lot seems to be the apparel group.  Academic studies dating from the mid 90's say as much, and the behavior has held up since.  Note that retails are generally non-volatile stocks, so one could certainly improve on the above "standard deviation effect" by excluding retails from the mix of non-volatile stocks.

The second half of December is notable for containing a cluster of days with the best average gains going back to 1950 (using the S&P 500 index).  The second, fourth, and fifth to last days of the year all have averaged around .3% gains.  Using Dow data from 1928-2004, one sees that the last half of the month has averaged 1.25% gains...the so-called "Santa Claus Rally".

Some gurus have pushed the notion that a strong Santa Claus Rally presages a strong year in the market.  Mark Hulbert has done a good job of debunking that little piece of wisdom, and our own seasonal chart of Dow performance in years that follow a strong Santa Claus rally adds further weight to the insignificance of this "phenomenon".

We have also examined December behavior using stocks drawn from the larger-cap S&P 500 from 1984 through 2008.  The general trends are quite similar to those listed above when examining this data.  The strategy of buying late November losers is particularly strong.  Again, yearlong gainers tend to fare well.  Buying stocks that fared well in the previous December makes sense here, as well as avoiding stocks that fared poorly in the same period.  

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