Do not Trade in December

The PCCRC strategies I have described are narrow in that the rules fit very specific scenarios of low volatility with the potential for increase. Over 3 years of experience trading these strategies, I have found a consistent seasonal characteristic: Volatility drops in December, earnings reports are rare and news releases are not common. The consequence is that good candidates are not likely to show up, and the existing positions may suffer from stagnation both in statistical and implied volatility.

This year is no different, despite the historical levels of volatility of the last 3 months, December has been proven to be a month of reseting of volatility both statistical and implied. It seems as though investors and traders alike have decided to take a beep breath in preparation for what it may come next year.

I promised myself last year that I would be out of my trades by the beginning of the month, but with all the historic events of October and November, I thought that things would be different, and decided to keep some of the trades in case there would be some strong moves. That was a mistake. One thing is clear, though, if this extremely volatile market found some relief this December, we can expect volatility to decline seasonally in December, and therefore, PCCRC traders should take December to find something else to do. This year I planned a vacation to Mexico, and will be back at the beginning of the year.

In a way, the PCCRC is keeping us out of the market: There are no high fliers to speak of, there are no 10% jumpers as of late, and the implied volatility in the back month options of most stocks is well above the standard maximum of 40%, according to my rules of entry. There are simply not many candidates that would fit my conditions, and the ones that are out there seems to be those that only a few months back would have been eliminated for having volatilities below 25%.

I have received e-mails from people suggesting that we ought to change the rules because the volatility standards have changed. The VIX has reached 80% at its high and have now settled down between 40 and 50% ant it is unlikely to return to it previous 20-30 natural range. I would say, do not change the rules in the middle of the game. The conditions are simply not favorable to this form of trading and modifying the rules would mean that you need to back test the system the way I did, over extended periods of time.

In my way of thinking, the rules are keeping us out of the markets are a perilous time, awaiting for a period of clarity when a few heroes will save the day! markets go down when most stocks go down, and up when most stocks go up. Invariably, there will be the stocks that will outperform the markets. We just need to wait until they show up, and with the rules of entry described in this blog, you will find them fairly routinely. We only need a handful to secure profits in the following months.

Once certain stocks begin to report better than expected earnings and increase their earnings guidance, we will have the candidates we are looking for, as they begin to fit the rules of entry. The question I would ask is, why would you trade anything else but the heroes? Even when they disappoint, their moves then to be dramatic. We need just wait for the appropriate time.

The current bullish run has mitigated volatility somewhat but has not revealed any candidates worth considering, which may be frustrating for some. I have to urge patience to avoid mistakes. In the meantime, consider other forms of trading. In due time the PCCRC will show it value.