The 4th of July Holiday Effect In Trading (Independence Day Effect – Backtest)

Last Updated on June 19, 2022 by Quantified Trading

The 4th of July (Independence Day) is one of the federal holidays in the US. How does it affect the US financial markets?

The US financial markets do not open on the 4th of July, being a federal holiday to mark US independence. No trading takes place on any of the U.S. stock exchanges and the bond market even closes early on the trading day before the holiday. Our backtests reveal that there is a pretty strong positive effect.

The 4th of July holiday – Independence Day

Also known as Independence Day, the 4th of July (or July 4th) is a federal holiday in the US. The holiday has been officially observed since 1941, but the tradition of Independence Day celebrations goes back to the 18th century when the US declared its independence on July 4th, 1776.

The day is often celebrated with festivities ranging from fireworks, parades, and concerts to more casual family gatherings and barbecues. Independence Day 2022 falls on is on Monday, July 4, 2022, and all US markets will be closed on that day.

Is the day before and after it a trading day?

While Independence Day is not a trading day for all US markets, the day before and after it can be trading days, depending on whether they or Independence Day fall into a weekend. When Independence Day falls on a weekday, the day before or after it is usually a trading day for the US stock markets.

However, the bond market closes earlier than usual on the trading day preceding Independence Day. For 2022, the NYSE and Nasdaq will trade full day on Friday, July 1, 2022, but the bond market will close at 2 p.m. Eastern Time.

What happens if the 4th of July is on a weekend?

When the 4th of July is on a weekend, the Independence holiday will be observed on the following Monday. On that Monday, the US financial markets will be closed, to reopen on Tuesday. The bond market will also close early (2 p.m.) on the preceding Friday.

The 4th of July holiday effect (Independence Day effect) (backtest)

The 4th of July is a public holiday and the markets are closed. If the 4th of July is on a weekend, the markets are closed on the following Monday.

How does the stock market perform up to Independence day?

Let’s test the following hypothesis:

  • We buy the S&P 500 at the close of the second last trading day of June. For example, we buy at the close on the 29th of June so we are long on the open of the last trading day of June.
  • We sell six days after we bought. The effect seems to last a few days after the holidays, thus we keep the position a bit longer.

Now, before considering the strategy, keep in mind that June is a poor month for stocks. Additionally, there is a strong tendency for the markets to perform much better in the last days of the month and the first few days of the new month. Please check out this article:

The strategy returns this equity curve in SPY:

The 4th of July holiday effect in tradingThere are 28 trades, the average gain is 1.01%, the win ratio is 68%, the profit factor is 2.97, and the max drawdown is 4%. This equals a CAGR of 0.5% while being invested just 0.6% of the time.

The returns per year look like this:

Several tests with different entry and exit dates indicate the effect is pretty good.

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