A Holiday Gift: Don’t Trade Until Next Year

There’s perhaps no more torturous headline than “XYZ moves big on low volume,” but I can bet you anything you’ll be reading that headline more than once between now and when professional traders, market makers, advisors and mom-and-pop investors alike return to their desks in earnest on Jan. 5.

This year’s holiday schedule is particularly brutal, with a trading day right after Christmas, and New Year’s Day right in the middle of the following week. The prediction is pretty easy to make: Volumes will be thin—fractions of their norms.

There’s no science to this, and surprisingly little academic research, but the conventional wisdom is that most of the smart, long-term money stays out of trading at times like this, and even major market participants will be running understaffed.

Wrong Time To Dabble

At the same time, amateurs are on vacation from their day jobs, and some of them will use these days to try their hand in the market.

The end result is actually somewhat dangerous. Fewer people trading means if someone who has both money and a strong opinion hits a given part of the market, they can find few people willing to take the other side of the trade—and that means big moves, on small volumes.

As an ETF investor, you’re perhaps slightly insulated from the level of disconnect that could hit an individual small-cap stock, but the dangers are very real, especially in less liquid securities.

Spreads are almost always wider when volumes are low, limit orders can go unfilled, and market orders can have surprise pricing as they sweep a very thin book.

Thin Trading Effects ETFs, Too

On top of that, in ETFs with less liquid underlyings, pricing can shift dramatically from day to day as the volumes go up and down from day to day.

Look at how the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68) traded last year on the thinnest trading days of the year:

Or the year before:

Also note what happened in small-cap stocks that same year, over the same period, using the iShares Russell 2000 ETF (IWM | A-86) as a proxy:

It’s not that these moves are irrational—there’s always news, there’s always a reason for people wanting to buy more than they want to sell, or vice versa.

The problem is that it’s just a terrible time to be either the buyer or seller on that news, because until the rest of the market comes back to work, you don’t really know whether the prices being paid are based on all the smart money processing all the information.

So my advice is simple: Unless you absolutely have to be changing your allocations or putting money to work, take the time off. Step away from the keyboard. The markets will still be here when you get back.

At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.