27 October 2016
Sometimes, when a  market 'anomaly' occurs, it could be a lucrative opportunity for short-term speculation. Photo: HKEJ
Sometimes, when a market 'anomaly' occurs, it could be a lucrative opportunity for short-term speculation. Photo: HKEJ

December anomaly: Will the trend hold for Hong Kong stocks?

December is usually a quiet month for stock markets as investors start to wind up their positions and call it a year.

Sometimes, however, a market “anomaly” occurs which could be a lucrative opportunity for short-term speculation.

The Hang Seng Index soared 1.8 percent or 384 points on the first day of December, ending a six-day losing streak.

Some analysts attributed the surge to the inclusion of the Chinese yuan in the International Monetary Fund’s SDR (special drawing rights) basket.

Meanwhile, the mainland’s A-share market remained calm.

I would ascribe this to a year-end market anomaly.

The Hang Seng Index has posted good returns in December in the past, particularly the first few trading days of the month.

Historical data shows the benchmark has risen 1.2 percent in December on average in the past two decades. In the past 30 years, it has been up 2.5 percent.

It has a 70 percent chance of moving up this month.

The index has been in a super upward cycle since its inception in 1964.

The adjusted average growth in December is 2.44 percent since 1964, making it one of the best months for investors. 

How long can the market sustain the rally?

In the past 20 years, the Hang Seng Index has outperformed in the first eight to 12 days of December and has typically bottomed out at the end of the year.

The index has gained 1.88 percent on average during the first five trading days of December in the past 20 years.

By contrast, increases in the first 10 and 15 trading days have narrowed to 0.67 percent and 0.26 percent, respectively.

What’s behind this anomaly?

Fund managers submit their performance reports during the first one or two weeks of December, their last chance to improve their output.

The “window dressing” effect before the year-end is the primary cause of the anomaly.

Investors could bet on the Tracker Fund (02800.HK) and constituents of the Hang Seng Index in early December and they might get an attractive return.

Also, about 40 percent of individual stocks have rallied during the first five and first 10 trading days in December in the past 20 years.

However, it remains unclear whether we are going to see a repeat of the anomaly this month.

This article appeared in the Hong Kong Economic Journal on Dec. 2.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal chief economist and strategist

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