The Turkey Effect

The Turkey, or Thanksgiving, Effect is a well-documented stock market phenomenon whereby the market is unusually bullish both the day before and the day after Thanksgiving. Nobody is certain why. Maybe people are overly-optimistic because they’re in a holiday mood or perhaps the big dogs on Wall Street split early and leave trading in junior hands.

Historical evidence
I don’t know the reason, but what I do know is that it certainly is no coincidence. According to a CXO Advisory Group web article, the day just before Thanksgiving (T-1) and the day after Thanksgiving (T+1) posted significantly higher returns. Return data collected from 1950-2006 showed T-1 days averaging about 0.37% and T+1 days averaging around 0.39%. These numbers look small but they’re roughly ten times the average daily return during that period!

Since 1990, however, the returns have been smaller: about 0.19% for T-1 and 0.22% for T+1 with the standard deviation of T+1 being the smaller of the two and within reasonable limits. What makes the T+1 returns even more remarkable is that it is a half-day session. (US equity markets close at 1pm ET.)

We need to look no further than today’s market action for confirmation of the Turkey Effect. The S&P 500 was up 3.5%, and I don’t think it’s unreasonable to expect a similar day on Friday. So, how can we best profit from it?

If you don’t trade index futures, try options
You can play the index tracking stocks, such as QQQQ (Nasdaq 100), SPY (S&P 500), or DIA (Dow Industrials) but to get the most bang for your buck, I recommend the December at-the-money (ATM) calls. The options fields for all of these tracking stocks are generally much more liquid (and cheaper) than their index options. The chart below shows today’s returns on candidate options.

The way to play these on Friday is to buy 10-15 minutes after the open (often the market slumps right after the open) and sell right before the close. You can place limit orders but make sure you’re out of your positions before the close as you don’t want to get stuck holding them over the weekend. (If nobody’s biting at your limit order, change it to a market order.)

If the market does the unthinkable and reverse direction, don’t get burned. Options need a bit more “wiggle” room than stocks, so I’d recommend placing a sell order if it drops below 20% of the purchase price.

Stock versus options returns
Today, the Q’s gained 4.2%, the SPY gained 3.9%, and the DIA was up 2.8%. If instead you had bought the options, your return would have been magnified more than ten times!

So, instead of charging off to the mall Black Friday morn, stay home and buy some index options. You only have to wait three and half hours to pick up your paycheck. The stores will still be there and hopefully you’ll have a lot more money in your pocket to buy that flat-screen TV and spread some holiday cheer.

Happy Thanksgiving!

Note: Do not trade options if you’ve never done so!

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