The 4th of July Holiday Trading Effect (Independence Day – Backtest, Strategy)
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.
When you read this blog post, the chances are that the calendar will show June or July. Can you make money on the Independence holiday? Below, we make some backtests to find out.
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 fourth last trading day of June.
- We sell seven 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 the article about the turn of the month trading strategy strategy.
The strategy returns this equity curve for S&P 500 (SPY):
From 1993 until today, the average gain per trade is 1.11%, the win ratio is 74%, the profit factor is 2.7, and the max drawdown is 14%. This equals a CAGR of 1.1% while being invested just 2.7% of the time. With the turn-of-the-month strategy in the back of our minds, we might argue there is no Independence effect—it’s a turn-of-the-month effect.
Let’s make a second backtest:
- We buy at the close of the first trading day of July; and
- We sell at the close of the first trading day after 4th of July.
We get the following equity curve for the S&P 500 (SPY) from 1993 until today:
The average gain per trade is flat (zero).
Holiday effects in the stock market
We have covered all the US stock market seasonal effects in trading. To sum up, we have the following other holiday effects in the US markets:
FAQ:
What is the impact of Independence Day on US financial markets?
The 4th of July is a federal holiday, and US financial markets do not open on that day. Independence Day has been officially observed since 1941, but celebrations date back to the 18th century. The markets are closed on the 4th of July, and there is a positive effect, as indicated by backtests.
What happens on the day before and after Independence Day in terms of trading?
The day before and after Independence Day can be trading days, depending on weekdays. The bond market closes early on the trading day preceding Independence Day. When the 4th of July is on a weekend, the holiday is observed on the following Monday, and markets are closed.
How does the stock market perform leading up to Independence Day?
There is a strategy involving buying the S&P 500 a few days before and holding for a short period after Independence Day, with positive historical returns. There are various holiday effects, including those on Martin Luther King Jr. Day, Presidents’ Day, Easter, Memorial Day, Labor Day, Thanksgiving, Black Friday, and the end-of-year rally.