The Holiday Effect in Stock Markets

The Holiday Effect in Stock Markets: Strategies and Seasonal Insights

The Holiday effect system in the stock market is a well-known anomaly and seasonality. Is there a way to profit from the holiday effect seasonality? Are there any holiday effects in the stock markets? If so, which holiday is the best?

The holiday effect strategy seems to be significant for Independence Day, Thanksgiving, and Christmas. In this article, we look at seven different holiday effects and seasonalities in the US stock market. We look at how the S&P 500 performs before and around these holidays.

What is a holiday?

A holiday is a non-trading day that is not a Saturday or Sunday.

In practice, this means we look at days around the 1st of January, Martin Luther King Day, George Washington Day, Good Friday, Memorial Day, 4th of July (not every year), Labor Day, Thanksgiving, and Christmas (not every year).

We have backtested all these holiday effects, and you can find all the research in our special article about holiday effect in stocks.

What is the holiday effect trading strategy in the stock market?

The holiday effect trading strategy in the stock market seeks to exploit any seasonal patterns that might happen around holidays.

The pre-holiday effect can be used as seasonal trading strategies. The holiday effect can also be called a calendar effect, which tends to give increased returns in stocks over a short period of time. These situations tend to happen around holidays, like, for example, the 4th of July. The days before the holiday and the days right after the holiday are assumed to show consistent positive patterns and returns.

The holiday effect trading system is widely analyzed and well-known. Despite this, we know very few traders who actually trade the holiday patterns. Is there a logical reason for this? In this article, we try to find the most profitable patterns.

To those who believe such an effect will make them rich, we have to disappoint you. The holiday effect is tiny but still abnormal in a few of them. It’s not a get-rich-quick scheme, but it could be a useful addition to your arsenal of trading strategies.

The holiday effect is not only happening in the US. This is a phenomenon that has been documented in multiple countries across the globe.

Fundamental reasons for the holiday effect in the stock market

Why is there a holiday effect in the stock market?

One reason could be lower liquidity as many go on holiday. When liquidity drops, it creates a “vacuum” that means buyers need to pay up to buy shares.

Why would they pay more for the shares? The reason could be more optimism around holiday times.

Another reason could be the lack of macro news. The stock market tends to drift upwards when there is no macro news. Volatility normally picks up when there is bad news, and it is rarer when there is good news.

A third reason could be that participants sell their risky assets before the holiday season to reduce risk. This, of course, could lead to selling pressure and, thus, lower prices ahead of the holiday season. When the sellers are done, the prices gradually drift up again. As mentioned above, this creates a “vacuum”.

How to measure the holiday effect on stocks

In this article, we look at the S&P 500 because it’s the most important index in the world. We use both the ETF with the ticker code SPY, but we also use ^gspc to look at data earlier than 1993. Both are downloaded for free from Yahoo!finance.

Some traders might disagree with how we test the holiday effect anomalies. That’s fine. There are no definite answers, and others might have something that works better.

As always, we are always happy if others are willing to share their insights and knowledge in the comments section.

Related Reading: SPY seasonality

S&P 500 returns by month since 1960

Before we start we want to have a look at the monthly returns per month in the S&P 500. This is to make a benchmark to measure the outperformance of the holiday effect.

Why is this important?

It’s important because some months are much better than others. Is the specific holiday effect good because of the pattern in that month or vice versa?

Nevertheless, here are the monthly returns in the S&P 500 from 1960 until 2021:

  • January: 1.07%
  • February: 0.08%
  • March: 0.96%
  • April: 1.56%
  • May: 0.23%
  • June: -0.01%
  • July: 0.71%
  • August: 0.22%
  • September: -0.61%
  • October: 0.94%
  • November: 1.57%
  • December: 1.33%

Clearly, the best period is from October until the end of April. This period has practically made all the gains in the market over the last 60 years. This effect we have previously documented in this article:

The Martin Luther King Jr. Day holiday effect:

The first holiday of the new year is the Martin Luther King holiday. The holiday is always on the third Monday in January and the stock market is closed to observe the day. The earliest date for the holiday is January 15 and the latest is January 21.

Let’s test the following hypothesis:

Holiday Effect Trading Rules

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The equity curve looks like this in SPY:

The stock market seems to get very little help from the murder of Martin Luther King, even though January is one of the best months over time. There are 29 trades, the average gain is -0.05%, the win ratio is 57%, the profit factor is 0.9, and the max drawdown is 11%.

We have made a more detailed study about The Martin Luther King Jr. Day Holiday Effect In Trading.

George Washington Day/President’s Day holiday effect

The second holiday of the year is President’s Day, officially called Washington’s Birthday, and is always on the third Monday in February. As with Martin Luther King Day, the February holiday falls between the calendar day 15 to 21.

We test the holiday effect in February this way:

  • We go long at the close on the first calendar day of the month that is higher than 11.
  • We exit at the calendar day 21 or more.

On the ETF with the ticker code SPY we get this equity curve:

The holiday effect is absent in February. There are 29 trades, the average gain is -0.24%, the win ratio is 52%, the profit factor is 0.77, and the max drawdown is 9%.

We have studied more about George Washington Day/President’s Day Holiday Effect In Trading.

The Easter holiday effect

The Easter holiday effect is one of the better ones.

Please read our full backtest on this link:

The Memorial Day holiday effect

Memorial Day, the day to honor the men and women who died while serving in the US military, is always on the last Monday of May.

Let’s test the following hypothesis:

  • We go long at the close the Wednesday prior to Memorial Day.
  • We exit at the close on the first trading day of June.

In SPY the Amibroker equity curve looks like this:

The chart indicates the effect is small to non-existent. There are 29 trades: the average gain is 0.18%, the win ratio is 59%, the profit factor is 1.17, and the max drawdown is 5%.

We have studied more about The Memorial Day Holiday Effect In Trading (Backtest).

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

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:

There 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.

We have made a more detailed study about The 4th of July Holiday Effect In Trading (Independence Day Effect – Backtest).

The Labor Day holiday effect

Labor Day is always on the first Monday of September. What has the performance been around this day?

Let’s the following strategy:

  • We buy the S&P 500 at the close of the second last trading day of August. For example, we buy at the close on the 30th of August so we are long on the open of the last trading day of August.
  • We sell at the close on the first Tuesday of September (after the first Monday).

The equity curve in Amibroker looks like this (100 000 compounded since the start):

There are 28 trades, the average gain is 0.11%, the win ratio is 57%, the profit factor is 1.14, and the max drawdown is 5%.

The result is pretty poor.

We tried both buying earlier and later but the results seem pretty random.

Keep in mind that September is historically the worst month of the year:

We have made a more detailed study about The Labor Day Holiday Effect In Trading (Backtest And Strategy).

The Thanksgiving holiday effect in the S&P 500

What about the famous turkey celebrations in November?

Thanksgiving is always on the fourth Thursday in November and began as a day of blessing for the harvest in the preceding year. The day is a non-trading day and the next day, Friday, is only half a trading day where the markets close at 1 pm Eastern Time. The Friday is called Black Friday because of its importance for the retail sector.

We test the Thanksgiving holiday effect this way:

  • We go long at the close the Monday prior to Thanksgiving.
  • We exit at the close on the first trading day of December.

By testing on SPY Amibroker returns this equity curve:

There are 28 trades, the average gain is 0.82%, the win ratio is 65%, the profit factor is 2.72, and the max drawdown is 5%. This equals a CAGR of 0.4% while being invested just 0.6% of the time.

The Thanksgiving effect has been pretty consistent since 1960 (ticker code is ^gspc – the cash index of the S&P 500):

We have made a more detailed study about The Thanksgiving Holiday Effect In Trading (Black Friday Effect).

The Thanksgiving holiday effect in the retail sector (Black Friday effect)

Because of Black Friday, which has developed into a consumer bonanza, it might be interesting to check the performance of the retail sector. We test by using the Fidelity Select Retailing fund (FSRPX). We use the same criteria as we did in the Thanksgiving holiday effect for the S&P 500.

The retailers perform slightly better than the S&P 500:

There are 35 trades, the average gain is 1.14%, the win ratio is 71%, the profit factor is 3.24, and the max drawdown is 6%.

Keep in mind, though, that November and December are strong months in the stock market.

The most wonderful time of the year: The Christmas holiday effect (Santa Claus rally)

One of the best periods of the year is just after Christmas and the first days of the next year. We have covered this in a separate article where we tested the end of year rally in stocks:

In practice, this is the same as the turn of the month strategy.

Let’s make a twist where we go long at the close of the first trading day after the 20th of December and sell on the first trading day of the new year.

The backtest in Amibroker yields this equity curve since 1960:

There are 60 trades, the average gain is 1%, the win ratio is 67%, the profit factor is 4.8, and the max drawdown is 2.9%. This is pretty solid results!

We have made a more detailed study about The End Of The Year Rally In Stocks (Santa Claus Rally/Effect Strategy).

Let’s look at what happens after a holiday:

Post-Holiday Seasonal Effect on the Stock Market – Strategy, Examples, and Backtesting

Is there an opposite effect? Is there a post-holiday seasonal effect in the stock market?

How do we backtest the post-holiday seasonal effect?

We backtest the S&P 500 using the ETF with ticker code SPY from 1993 until today. We both buy and sell at the same day’s close as the signal.

We use Amibroker’s strategy optimization function and test by exiting after 1-5 trading days.

Post-holiday seasonal effect backtest no. 1

In the first backtest, we buy the close before the holiday and sell on the close N bars later (max five days later):

Post-holiday seasonal effect

The first column shows when we exit the trade. The first row is one day and until the 5-day holding period. As you can see, holding over the holiday has produced no gains, while the second day after the holiday has made pretty good returns.

Let’s test and divide by months. The table below shows the different months (first column) and the performance by holding one day:

Post-holiday seasonal effect backtest

The table below shows the different months (first column) and the performance by holding two days:

Stock market performance after a holiday

Post-holiday seasonal effect backtest no. 2

Let’s buy on the close of the first day after the holiday and hold for N bars:

Backtest after non-trading day

The first column shows which bar we sell on. As we saw in the first test, the second day after the holiday is best, with a profit factor of almost 2. The equity curve looks like this:

post holiday trading strategy

If we divide it into different months it looks like this:

post holiday trading strategy backtest

Options expiration week

Some holidays often end in an options expiration week, while others are after options expiration week. Hence, the performance during holidays might also be dependent on that.

Holiday-Season-Trading

Post-holiday seasonal trading strategy

Is it possible to develop a tradeable trading strategy based on the post-holiday effect?

Yes, by adding one more variable we get this equity curve by holding from the close to the next day’s close (the holding period is one trading day, something we like to call an overnight trade):

Post-holiday seasonal trading strategy trading rules

There are just 100 trades over the period, but the average gain is 0.56%, the win ratio is 71% and the profit factor is 4. This is a seasonal trading strategy and trades on a certain date plus one other variable – two variables in total. The annual return is 3.5% while only being invested 1% of the time. Another key performance metric is risk-adjusted returns and this shows about 250%.

Post-holiday effect strategy – conclusions

Short-term trading is mainly about finding inefficiencies in the markets. This article has provided some ideas on how you can profit from the holiday effect but by looking at the days after the holiday – let’s call it the post-holiday effect. The last strategy, which we didn’t reveal, doesn’t trade often, but this is precisely why you want to automate your strategy. Small edges add up.

Conclusions about the holiday effect in trading

Of the seven holiday anomalies and seasonalities we did in this article, only three seem to be tradeable: Independence day, Thanksgiving, and Christmas.

However, all the strategies can be changed and tweaked. We have some ideas to improve the three best holiday seasonalities, which we will return to later.

The holiday effect in stocks is for real.

FAQ:

– What is the holiday effect in the stock market, and can it be profitable?

The holiday effect, also known as a calendar effect, refers to the observed anomaly where stock markets tend to experience increased returns around specific holidays. While the effect is often small, it can be considered a seasonal trading strategy. Profitability depends on various factors, and it’s not a guaranteed get-rich-quick scheme.

– Which holidays exhibit significant effects in the stock market?

Independence Day, Thanksgiving, and Christmas are holidays that show significant effects in the stock market. These holiday effects involve specific trading strategies based on historical patterns before and around these holidays.

– How is the holiday effect measured on stocks, particularly in the S&P 500?

The S&P 500 is often used for analyzing the holiday effect. The strategy involves going long or short based on specific criteria before and after holidays. Monthly returns in the S&P 500 are also considered for benchmarking the holiday effect against overall market performance.

Is there a post-holiday seasonal effect in the stock market?

There is no specific post-holiday seasonal effect in the stock market.

The holiday effect in stocks refers to a positive seasonal trend observed on the days leading up to holidays. It suggests that there may be trading opportunities during this period. There are tradeable post-holiday seasonal effects in the stock market. The article discusses one such idea that is later published as a monthly trading edge for subscribers.

How is the post-holiday seasonal effect backtested?

The first backtest involves buying the close before the holiday and selling on the close one to five days later. The results show that holding over the holiday has produced no gains, while the second day after the holiday has shown good returns. The post-holiday seasonal effect is backtested on the S&P 500 using the ETF with the ticker code SPY. The strategy involves buying and selling at the close of the same day as the signal.

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