Why Black Friday could be profitable for investors

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The U.S. Thanksgiving holiday arrives this Thursday. Historically, equity markets on both sides of the border have moved higher during the day before and the day after Thanksgiving. Will it happen again this year?

Two of the strongest days of the year for U.S. equity markets are the day before and the day after U.S. Thanksgiving Day. Thackray's 2012 Investor's Guide notes that, "The day before Thanksgiving and the day after have had an average cumulative return by the S&P 500 Index of 0.8 per cent per period". During the past 61 periods, the Index gained in 50 periods, was unchanged in three periods and slipped in eight periods."

Performance of the TSX composite index during the U.S. Thanksgiving rally period also has been positive. Since its relaunch in March 2000, the index has advanced in nine of the past 11 periods.

Strength during the period is influenced by a difference in sentiment between institutional and individual investors. Most institutional investors and market makers have a diminished impact on equity markets because they close their books at midday on Wednesday, the day before Thanksgiving. They take an extended long weekend including a holiday on Friday, the day after Thanksgiving. Individual investors have a greater impact on equity markets. They are in a buoyant pre-Christmas mood. Thanksgiving Day in the U.S. is the start of the Christmas shopping season. The day after Thanksgiving Day is known as "Black Friday" and traditionally has been the busiest shopping day of the Christmas season. It became known as "Black Friday" because historically that is the date when retailers finally turn a profit for the year. Their profit and loss statement literally turns from red to black.

Prospects for a Thanksgiving rally in U.S. and Canadian equity markets from Wednesday to Friday this week are better than average. October retail sales in the U.S. reported last week were higher than consensus, implying that consumers are returning to the stores for the Christmas season. In addition, retail merchandisers such as Target Stores and Wal-Mart offered positive guidance for the fourth quarter after releasing third-quarter results last week. Consumer electronic goods are a particularly hot item this year. In order to prepare for the annual crush on Black Friday, at least some stores have decided to open on Thanksgiving Day for the first time. Others have decided to open at 12:01 AM on Friday.

On the charts, the retail merchandising sector has a positive technical profile, reflecting an encouraging fourth-quarter outlook. Investors interested in the sector tend to focus on two actively traded exchange traded funds, Retail HOLDRs and S&P Retail Index SPDRs . Retail HOLDRs touched an all-time high early last week despite a significant decline by equity markets around the world. According to Thackray's 2012 Investor's Guide, seasonal influences for the retail merchandising sector are particularly strong from Oct. 28 to Nov. 29. Average gain per period during the past 21 periods was 6.2 per cent. The trade has been profitable in 19 of the past 21 periods.

Retail HOLDRs holds 18 retail merchandiser stocks. Largest holdings and their portfolio weights are Wal-Mart (18.3 per cent), Home Depot (13.6 per cent), Amazon.com (13.4 per cent) and Target (7.6 per cent). Management expense ratio is zero.

S&P Retail Index SPDRs holds a more diversified portfolio with 96 retail merchandiser stocks listed on U.S. exchanges. Largest holding is Aeropostale with a 1.6 per cent weight. Management expense ratio is 0.35 per cent.

Preferred investment strategy is to defer the sale of equities, exchange traded funds and mutual funds until after the U.S. Thanksgiving rally period.

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/