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Martin Zweig: How His ‘Bright Idea’ Could Ruin Your New Year
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Tuesday, December 23, 2003: Issue #300
“The major drawback with holiday trading is that there aren’t enough holidays!” says Martin Zweig, in the book Winning on Wall Street, published in 1986
A 146.3% annualized return – that’s what you’d have made following Martin Zweig’s New Year’s Eve trading strategy and you would have done it for 33 straight years…
In his book Winning on Wall Street, Zweig tested the trading patterns surrounding the holidays.
The last trading day of the year, usually New Year’s Eve, seemed to defy statistical explanation. In the 33 years ended in 1984, Martin Zweig reports that stocks fell on the last trading day of the year in only one of those years – making the New Year’s Eve bet practically a sure thing.
A similar phenomenon occurred around other holidays, too, with even better returns in some cases (the day before Labor Day and the day after Thanksgiving). But it’s been awhile since these were tested (although I’ve been referring to them for years – I even referred to them in something I wrote this morning!)
So should we gear up for another New Year’s Eve surge and increase all our position sizes? Let’s dig a little deeper for the answer…
Happy New Year… But Not for Martin Zweig’s Strategies
With Christmas and New Year’s Eve upon us, I figured this was an excellent opportunity to see if these strategies still are in effect. Especially considering that three of Martin Zweig’s “exceptional” holiday trading days (the days before and after Christmas, and New Year’s Eve) are coming up.
Well, I crunched the numbers and they are decisive.
It turns out the holiday strategies don’t seem to work anymore at least for Christmas and New Year’s.
This exercise reminded me of an old Wall Street saying: Once everybody knows about a trading strategy, it doesn’t work anymore. And with Martin Zweig’s book an investment bestseller by 1986, everybody knew about these patterns.
As I said, the numbers are clear. Since 1986, stocks have risen on the last trading day of the year only eight out of the last 17 years less than half the time. Martin Zweig’s New Year’s Eve strategy is now a bust. The same is the case for the Christmas Eve and day-after-Christmas patterns
The Bigger Message Here…
The big message here is the idea that once everyone knows about a trading strategy, it won’t work anymore.
A more popular example of this is the “Dogs of the Dow” strategy that many brokers and mutual fund companies were pushing years ago, after it appeared in another bestseller, Beating the Dow, by Michael O’Higgins. (If you don’t know what this book’s all about, that’s okay, don’t bother finding out.)
The strategy worked for 30 years in the past. But as soon as everyone started doing it (as much as $50 billion may have been invested in this strategy at its peak of popularity), it was no longer an outperforming strategy.
The funny part is, the inventor of the strategy – O’Higgins himself – was even saying it wouldn’t work anymore. That didn’t bother the mutual fund salesmen, who had a good story to tell.
My ultimate point: Play it safe this holiday season. Contrary to popular wisdom, there are likely no quick trading profits to be made from these three holiday days.
Good investing,
Steve
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