Do trading ranges die near the end of the year?

It’s that time of year again.

Snow, Turkey, Football and far too much family (well, maybe not this year).

Oh, and egg nog (does anyone actually still drink that?)

In the markets, this time of the year signals a closing of the books, tax considerations, trading volume dropping and trading ranges disappearing.

… Or do they?

More than once this week we have heard “Patterns don’t exist near the end of the year because the markets have no range” and “I stop trading on the 15^th because markets die after that date” and “Algos die in silence and the markets go silent until mid-January”

That may be the perception, but is it the reality?
Let’s run a test (math nerd fun).

Testing the S&P E-Mini futures

The S&P E-Mini futures opened on September 11^th, 1997. As of the end of November, this gave us 5858 trading days to analyze over about 23.25 years… more than enough data to find reliable statistics.

This market opened at 1050.50 (Dec 2020 continuous contract pricing) and closed November at 3623.25. This means the value of a point is different at the beginning of this period vs. the end. So we decided to run this test a few different ways in order to adjust and compare.

First, we looked for the average trading range in points over any consecutive five day period. We took the maximum high minus the minimum low over each consecutive five day period and plotted the results. This gave us an average weekly trading range of 55.45 points (median of 43.75) with significant increases over the last year or so (as one would expect given current events and a higher daily closing value).

Average trading ranges

As a comparison, we looked at the average trading range as a percentage over any consecutive five day period. Again, we took the maximum high minus the minimum low and divided that result by the closing value on the last day of the period. This gave us an average weekly trading range of 4.11% (median of 3.26%)

This comparison allowed us to see that the average (and median) weekly trading range has been quite consistent over the last 24 years. Some obvious exceptions can be seen during the dot com bubble and in 2008. The weekly trading range ending the week of October 10^th, 2008 was 42.08% and the thought of that still makes our hands sweat.

But did the trading ranges die near the end of the year?

These tests show us how trading ranges have faired over long periods but they don’t show us if ranges “die near the end of the year.”  For that, we had to cut the data up by specific days of the year. For example, we wanted the data to show us the average trading range on March 5^th of every year… or April 8^th, etc. Given the nearly 24 years of data, every calendar day was going to have roughly 17 results (factoring out weekends) with two exceptions…Jan 1^st and December 25^th where trading never occurs.

When we plot that data, we see some obvious results. March and October have increased ranges (largely pulled higher by the anomaly years of 2000-2002 and 2008) while the rest of the year is mostly consistent around 50-55 points per week. July 18^th is oddly lower over a 24 year period as is May 1^st.

But what we were really looking for was the “death of trading ranges in December.” And with the exception of the last 4-5 days at the very end of the year, trading ranges remain consistent throughout the month. It appears as though they even steadily increase until the 24^th of the month.

So yes. Trading ranges “die in December” if by December you mean the last 5 trading days of the year (between Christmas and Jan 1^st). This year, those trading days only represent 4 days from the 28^th to the 31^st.

One last comment. We have also heard “trading volume drops precipitously throughout December.” We have also run this test with similar results (volume drops over the last 4-5 days of the year). But more importantly, a drop from 10M contracts to 4M contracts is not going to prevent anyone from placing an order to buy or sell a few lots. You’re unlikely to ever see “sorry, your order size is too large.”

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