Stock market investors usually overreact to initial reports about Black Friday and Cyber Monday.
At a minimum, that means you should ignore those reports. And if you’re a contrarian, a gutsy short-term trade might be to bet that the market after Cyber Monday will reverse the direction it took over its first two post-Thanksgiving trading sessions.
I reached those conclusions upon analyzing the stock market’s reaction on Black Friday and Cyber Monday. I documented a strong inverse correlation between its net return over those two sessions and its performance after Cyber Monday through the end of the year.
I’ve written about this reversal pattern before, and it continues to hold up. Take last year, when Black Friday traffic at U.S. stores was down 52%. Though online sales made up some of the slack, the S&P Retail Select Industry Index SPSIRE, -1.43% still fell 1% over the two sessions Black Friday and Cyber Monday. But then came the reversal: After Cyber Monday through the end of 2020, the index gained 7.4%.
One year’s experience does not a pattern make, of course. The accompanying chart, below, reports the averages for all years since 1999, when this index was created. There is a 6.3 percentage point difference between the two averages, which is statistically significant.
I also found evidence of this reversal pattern in the Dow Jones Industrial Average DJIA, +0.55%, though it’s weaker for this broad index than for the retail sector in particular. Consider the DJIA’s performance since 1981, which according to Wikipedia is the earliest known reference to Black Friday as the day when retailers move out of being in the “red” for the year and into the “black.”
| When DJIA over first two post-Thanksgiving trading sessions … | DJIA’s average return from after Cyber Monday through the end of the year |
| Falls | 2.3% |
| Rises | 1.8% |
Note carefully that, for the DJIA, this reversal pattern is only marginally statistically significant (at the 93% confidence level, not the 95% level that statisticians often use when determining if a pattern is genuine). So these statistics don’t justify throwing caution to the wind with any year-end bet, especially at the level of the overall market.
The primary investment takeaway is to sit on your hands as you read and hear talking heads endlessly analyze the initial retail reports. At a minimum those initial reports are worthless, and possibly even worse than worthless.
The broader investment lesson is that investors typically overreact. To disappointing news they will react by thinking the world is coming to an end, and to better-than-expected news they will conclude that happy days are here again.
Rarely are either of these extremes actually the case. This is why sitting on your hands is good advice at almost any time of the year, not just on and after Thanksgiving.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.