Why year-end markets are full of opportunity (and danger)


Timing is everything

There are
certain times in the markets that present risks and opportunities. In the
market, different times have different characteristics. This is true on a day
to day basis.

For example, at
the end of the US and before the Asian session the market becomes particularly
illiquid and flash crashes can move the market hundreds of points on very
little. This is a vulnerability that occurs at certain times.

In a similar way, the end of the month and end of
financial years have influences on different currencies too. This article will
focus on year-end markets and both the risks and opportunities that lie
within them


Buying gold on the last day of the year

One of the best
ways to end the year is to consider buying Gold at the end of December in
anticipation of the strong pattern of buying Gold, which takes place with a
surprising regularity, in the month of January.

Over the last
few years this seasonal pattern has shown particular strength. If you include
the months for February and March too there has only been negative returns
once, in 2013. This year presented a really good opportunity to take advantage
of this pattern as there were also strong fundamental reasons to buy Gold.

The concern over
the US-China trade war accelerated as President Trump became more and more
vocal in his combative stance. The market feared that a hostile trade war
between the US and China, which constitute around 40% of the entire world’s
GDP, would spark a global slowdown in growth.

The result was that Gold was bought as a safe haven
currency into year-end as US equities plummeted. Cryptocurrencies had also declined
during the year as an alternative safe haven and Gold technicals looked good
with a close above the highs of $1244. It was a great year start for Gold as


Japanese financial year end in March

At the end of
the Japanese financial year, which is at the end of March, many Japanese firms
look to consolidate the years profits. As Japanese firms move their profits
they bring them back home by buying the Japanese Yen.

These Yen flows
are typically seen in the last couple of weeks into March and end around three
days before the end of the month. One of the best times to see these Yen flows
coming into the market is around the London Fix.

The London
starts at around 1600GMT each weekday and this is when a number of FX
transactions occur out of London. The characteristic of these transactions at
this fixing timing is that they are not run by speculators, but they are normal
businesses who are having their money exchanged for purchases and employers

In this instance there can be an uptick in JPY buying
as Japanese firms repatriate their profits. This JPY repatriation is not
necessarily an easy phenomenon to trade, but it still serves to offer some explanation
for strange JPY moves into Japanese year end and traders should be particularly
aware of trading any JPY pair in the last two weeks of March around the London

The January effect

There are strong
tax and psychological reasons that mean a number of stocks show what is known
as ‘the January effect‘. This is simply reference to a widely
anticipated cyclical pattern in stock markets that occurs for a number of

investors are simply closing their profits for the year and some investment
firms are wanting to ensure they book their year-end profits and so they close
their positions going into November and December.

There is also a
tax incentive and losing trades can be closed at year end to offset any tax
implications of winning trades already booked. The impact seems to be seen most
acutely in small caps.

One study
conducted by the firm Salomon Smith and Barney between 1972 and 2002 found that
the stocks of the Russell 2000 index outperformed stocks in the 1000 index
during the month of January. The interesting thing to note was that the
outperformance was around 0.82%, but the stocks underperformed during the rest
of the year.

The usefulness of this fact has been questioned by
some due to the necessary transaction costs in trying to capitalize on it.
However, possessing strong fundamental reasons to purchase a stock at this time
means that you potentially benefit from a year-end tail wind.

Year-end USD demand starts in November

At the end of
the year there is demand for USD and typically speaking November is good month
for broad USD strength. Over the last 5 years the Bloomberg Dollar Index
(BBDXY) has increased +1.6% during November and that increases to +1.8% if you
go back over the last 10 years.

The conventional wisdom is that USD buying takes place
in December, whereas there is greater evidence of USD buying in the month of
November as opposed to December.

The year-end oil effect

Oil has a very
strong year-end effect and it tends to have a period of depreciation at the end
of the year.  In the month of October Oil
prices have fallen 13 times and that general pattern of weakness has often flowed
through to the months of November and December.

By contrast, the
months of February through to April are typically strong seasonal times for
Oil. Therefore, traders should be particularly alert as we approach year end
for fundamental reasons to short Oil as a strong seasonal pattern may give you
a tail wind.

although this article is about year-end markets, it is worth pointing out that
February should be considered for potential long US Oil positions. This year,
that trade has already played out well for the month of February as OPEC cut
their oil production levels, Venezuelan and Iran sanctions further hit supply
and US oil rigs numbers steadily fell. It proved to be an excellent example of
a strong seasonal pattern reinforced by good fundamentals.

So, there you have it, year-end markets offer
opportunities and risks, so look out for these characteristics for the
end of 2019.

article was written by the ADSS Research Team.

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