These are not one-offs, either, as academics have shown that changes in our mood can directly affect our behaviour patterns, including how we make investment decisions (Paper 'Winter Blues: A SAD Stock Market Cycle', Mark Kamstra, Lisa Kramer and Levi, Federal Reserve Bank of Atlanta, October 2003). Moreover, as I proved in the summer of 2010 with my highly profitable short index trade on the S&P 500 at the start of the FIFA Football World Cup, the US equity market has a nasty habit of falling during the month-long tournament ('A World Cup Winner', 14 May 2010), so we can take advantage of the mood changes of investors, and their impact on the performance of the stock market, if we know when this is likely to occur. And the mood of investors have great relevance right now because this week we can take advantage of another one of my favoured and highly profitable short-term trades: St Patrick's Day.
St Patrick's Day
In a study, 'Testing for Non-Secular Regularities in Stock Returns and Trading Activity', academics Laura Frieder and Avanidhar Subrahmanyam looked at the performance of the US stock market between 1946 and 2000 around the time of St Patrick's Day. This Catholic holy day was first celebrated more than 300 years ago, and has since become a festive occasion, with the Irish community celebrating the day, which falls on 17 March each year, by drinking and parading. This positive behaviour seems to spill over to investors, with the US stock market rising on average by 0.34 per cent two trading days prior to St Patrick's Day, by 0.37 per cent the day before, by 0.07 per cent on the day itself and by 0.19 per cent on the day after. Cumulatively, that is a return of 0.97 per cent over the four-day period.
And the trend for prices to rise around St Patrick's Day still seems to be working: the S&P 500 rose by 0.6 per cent over the four-day trading period in March 2006, 1.6 per cent in 2007, 1.7 per cent in 2008, a hefty 5.8 per cent in March 2009 and 1.4 per cent in 2010. And even in 2011 when markets were incredibly volatile in March in the aftermath of the Tokyo earthquake, and the trade would have been closed out for a small loss the day after St Patrick's Day, investors who held their nerve for a day longer would have made a profit. Normal service was resumed last year when the S&P 500 rose by 0.8 per cent over the four-day period.
Reasons for this phenomenon
Part of these healthy gains could result from the fact that March is a good time of the year to be invested in equities. But the average return on the four trading days around St Patrick's Day accounts for almost all the 1 per cent return the S&P 500 index has averaged over the month of March in the past six decades. That's astonishing, so perhaps there is another factor at play here?
Another reason for the market to rise in this four-day trading period is the crossover with 'triple witching week', when stock options, index options and index futures all expire on Wall Street. This can give the S&P 500 a boost as traders settling these options and index contracts may be forced to buy into the market to close their positions.
The market has risen far more often than it has fallen during triple witching week over the past two decades. And as triple witching day in the first quarter falls on the third Friday of March (Friday 15 March this year), there is more often than not some crossover with St Patrick's Day.
Trading strategy: St Patrick's Day
The standout trading strategy is to buy the S&P 500 index two days before St Patrick's Day and look to take profits at the close of trading the day after the festival to try to capture the near-1 per cent average rise in the index over this four-day period. One way of implementing this trading strategy is to use structured products as providers such as Societe Generale and Royal Bank of Scotland offer a range of covered warrants and listed products on the S&P 500.
Playing this trade through covered warrants is my preferred option and, in particular, I like Societe Generale's covered call warrant SD32, which has an exercise price of 1500, expiry of 21 June 2013 and a parity of 100:1. With the index trading at 1548, the warrants are priced on a tight bid-offer spread of 60.5p to 60.9p, which means that 54 per cent of the warrant price is 'in the money' and the balance is 'out of the money'. The effective leverage of the SD32 call warrants is around 10 times the movement in the S&P 500 index, so a 1 per cent movement in the index would translate into a 10 per cent movement in the covered warrants, all things being equal.
The index can also be bought through a spread bet and, since you are betting in sterling for every point movement in the S&P 500, there is no currency risk, either. Profits from spread betting are tax-free in the UK and you can place a bet from as little as £1 per point on movements in the index. Spread-betting providers in the UK include City Index, IG Index, Capital Spreads, CMC Markets and Cantor Index.
Finally, if you have access to a CFD trading account you can always gear up an exchange traded fund (ETF) listed on the London Stock Exchange that tracks the performance of the S&P 500. ETFs on the index include iShares (TIDM: IUSA).
St Patrick's Day falls on Sunday 17 March this year, so my recommended trading strategy is to open your trading positions on the S&P 500 just before the close of trading in London on Wednesday 13 March and then look to close out the position on Tuesday 19 March.
