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On Dec. 14, Jim Cramer
wrote a small article suggesting that
, given their beat-up status, might be a good, albeit gutsy play. The trade is slightly down, but I agree with him and think it's a good play here.
However, I'd like to offer one twist to the play. Every year around this time, retail stocks are more volatile than usual. The slightest hint that Christmas sales might be a little off-kilter can sometimes send these stocks into a death spiral.
Retail HOLDRs have only been around since 2001, so there's really not enough data to analyze. However, I took a look at the components and data going back 20 years. In the tests below, I ignored their respective weights (
alone make up 40% of RTH) and did every simulated trade equal-weighted (as any portfolio manager would do anyway, other than an index manager).
For each stock in the RTH, over the past 20 years, what happens if you buy the stock on Dec. 15 and hold for three weeks? The average weekly return is decidedly not bad: 1.16%, making the strategy of buying RTH on Dec. 15 and holding for the holiday season a decent seasonal strategy.
However, a slightly better twist is as follows:
Between Dec. 15 and Dec. 31, you buy stock XYZ (a component of RTH) at the open if it fell 2% or more the day before, and you hold it for one week. The average return per trade over the past 20 years on RTH components has been 2.51%, a significant improvement over buying and holding every RTH component on Dec. 15. I think the reason for this is that people unreasonably panic when they think retail sales are going to be bad for a particular company. People tend to overestimate the effect, for instance, of cold weather on retail sales. They realize their mistake (or better investors do) within days, and the stock goes up accordingly.
Just as a gut check to make sure this is a phenomenon peculiar to the holiday season, doing the same strategy described above over the past 20 years -- but at any time of year (rather than just Dec. 15-31) -- only results in an average return per trade of 0.50%, as opposed to the 2.51% average return above.
In conclusion, I would definitely be a buyer the next day of any RTH components if they fall 2% on any day between Dec. 15 and the end of the year. I would buy and hold for one week.
James Altucher is a partner at Subway Capital, a hedge fund focused on deep value and arbitrage opportunities, where opportunities are identified using proprietary software. Previously, Altucher was a partner with technology venture capital firm 212 Ventures and was CEO and founder of Vaultus, a wireless and software company. He holds a bachelor's degree from Cornell and was a doctoral candidate at Carnegie Mellon University. Email him at