Memorial Day Holiday Effect in Trading – Backtesting and Strategy
The Memorial Day holiday is one of the federal holidays in the US. How does it affect trading in the US financial markets?
The US financial markets do not open on Memorial Day because it is a federal holiday. Trading does not take place on any of the U.S. stock exchanges on that day, and on the Friday preceding it, the bond market closes early.
We show you the stock market performance around Memorial Day.
The Memorial Day holiday
Memorial Day is a national holiday in the US in honor of the men and women who died while serving in the U.S. military. It originated in the years following the Civil War and was originally known as Decoration Day.
Many Americans observe the holiday by visiting cemeteries or memorials, holding family gatherings, and participating in parades. Unofficially, Memorial Day marks the beginning of the summer season.
When is it?
Memorial Day is observed on the last Monday of May every year.
Why do we celebrate it?
We celebrate Memorial Day to honor U.S. men and women who died during the Civil War. The war, which ended in the spring of 1865, claimed more lives than any conflict in U.S. history and required the establishment of the country’s first national cemeteries.
Now, the holiday also honors American soldiers who died in other wars, as well as other Americans who died in service to their nation.
When did we start celebrating it?
The Memorial Day observance started during the American Civil War when citizens placed flowers on the graves of those who had been killed in battle. By the late 1860s, Americans in various towns and cities had begun holding springtime tributes to these countless fallen soldiers, but it was not until 1971 that Memorial Day became an official federal holiday.
Is it a nontrading day?
Yes, it is a nontrading day. Trading does not take place on the New York Stock Exchange or Nasdaq on Memorial Day, and the bond market closes early on the Friday preceding it.
The Memorial Day holiday effect (strategy backtest)
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 on the Friday before Memorial Day.
- We exit at the close N days later.
If we backtest the cash index of the S&P 500, we get the following results if we sell N trading days later (from 1980 until today):
The table shows that the best results are when we sell after 3 or 4 trading days (Thursday or Friday after Memorial Day). If we sell three trading days after the Friday before Memorial Day, at the close of Thursday, we get the following equity curve:
The average gain per trade is 0.6%, but the best days seem to be in the past. That said, it’s pretty consistent, but part of the effect could be explained by the turn of the month seasonal pattern. Memorial Day is always at the end of the month.
However, the Russell 2000 has performed better. Below is the same strategy as above in the cash index from 1988 until today:
The average gain per trade is 0.78% – pretty nice!
Holiday effects in the stock market
We have covered all the US stock market holiday effects in trading.
FAQ:
When is Memorial Day observed?
Memorial Day is observed on the last Monday of May every year. The observance for 2022 took place on Monday, May 30, while that for 2023 will take place on Monday, May 30. Memorial Day is one of the federal holidays in the United States.
Why do we celebrate Memorial Day?
We celebrate Memorial Day to honor U.S. men and women who died during the Civil War. It now also honors American soldiers who died in other wars, as well as other Americans who died in service to their nation.
What is the Memorial Day holiday effect in the stock market?
The Memorial Day effect is the above-normal returns in the stock market after Memorial Day.