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But, of course, I can't always resist. Last year, Chris Rugaber, who was writing a Foolish Four Portfolio Report once a week before his duties as editor of the Monthly Fool took up all his time, did an interesting study of the period just before and just after the first of the year for 1998 and 1999.
Among the things he found was a "gap up" in prices for Foolish Four stocks on the first trading day of the year. Between the close of the market at the end of the year and the opening bell at the beginning of the new year, the prices actually rose. What was happening was that big institutional investors like brokerages, pension companies, and mutual funds were buying heavily from each other in the "after hours" market. That's all well and good, of course. The problem is that this brief flurry of demand didn't hold up, and within a week or two, prices were right back where they had been at the end of December.
At about the same time, I had the opportunity to compare a strategy that traded high- yield Dow stocks on the last trading day of the year (using the prices from the close of business on December 31, or the last trading day of the year) with an identical strategy that used closing prices from the first trading day of the year -- the very next market day. This was a two decade comparison. I found that the December results averaged half a percentage point higher.
Now a half a percentage point isn't a lot when comparing two averages, but combined with Chris's study and the shape of the curve that we find when we compare portfolios that renew in January, February, March, etc., it looked to me like January 2 was a dangerous day to trade.
I mean "dangerous" in the sense that if one waited until then, the prices one would end up paying might easily be inflated several percentage points over what you would have paid just one trading day earlier. That can really wreck your annual return. Most likely, this rise was due to the popularity of the high-yielding Dogs of the Dow strategies. Institutional investors that had sold Unit Investment Trusts based on the Dogs of the Dow, were buying up those high-yield stocks for their trusts and causing a short-term price increase.
Of course, we all know that the Dogs of the Dow are no longer wildly popular. In fact, their popularity (and the fact that Philip Morris was included in their portfolios) may have been what sunk them. Many of those brokerages weren't getting very good prices if they bought during that flurry of demand at the beginning of the year. Could a lack of interest in the high-yielding Dow stocks have contributed just a little bit to last week's precipitous drop on the first few trading days of the year? Maybe.
I honestly expected the market to "pop" last week. Kind of like it did this week. Instead, the first two days of the year had at least some investors shaking in their boots and mumbling, "As January goes, so goes the year," an old Wall Street saying. Of course, January hadn't had a chance to go much of anywhere in two days, but that didn't stop the worrying. (I confess to a few such stray thoughts myself.)
So instead of a riotous New Year's party on Wall Street we had something more resembling a millennium hangover. Investors were probably thinking, "If I'd just waited a few days to buy, look at all these bargains...." Or maybe they would have thought, "Wow, I can't buy in now, the market is dropping like a rock," so they waited until the Dow hit a new high on Monday, except then they would think, "I can't buy now -- with the market at an all time high!" Only it just kept going higher all week.... Aaarrrrrgh!
It's best to follow the plan.
So even though I was really wrong about what I thought was going to happen at the first of the year, buying in late December is still a pretty good idea. At least things are (usually) quiet then because of the holidays. Oops, I think I've just guaranteed a major market upset for next December 29th.
Fool on and prosper!