New Year’s Eve Effect in Stocks

New Year’s Eve Effect in Stocks: Rules, Video, Backtest, Analysis

New Year’s Eve is often a time for optimism and celebration. Does this spill over to the stock market? Is there a New Year’s eve effect in stocks

There is no particular seasonal New Year’s Eve effect in stocks, but we see a positive return over the first few trading days of a new year. 

Related reading: Many free seasonal trading strategies

Let’s explain what we did:

New Year’s Eve Effect In Stocks – trading rules

First, let’s look at the performance on the last trading day of the year. 

  • We buy S&P 500 at the close on the second last trading day of the year; and
  • We sell at the close on the last trading day of the year.

Since 1970, this has generated the following equity curve:

New years eve effect in stocks
New years eve effect in stocks

Not much New Year’s Eve effect here!

The average is zero, and it’s been pretty negative over the last decades. 

Let’s change the trading rules:

  • We buy S&P 500 at the close on the second last trading day of the year; and
  • We sell after N trading days.

We get the following table:

The first days of the new year are positive. If we hold for four trading days we get the following equity curve:

This means we sell at the close of the third trading day of the new year. Thus, just like in any other month of the year, we see a positive return during the first trading days. 

All in all, there is no particular New Year’s Even effect, but optimism spills over into the new year.  

FAQ:

What trading rules were applied to analyze the New Year’s Eve effect in stocks?

Two sets of trading rules were applied. First, buying S&P 500 at the close on the second last trading day of the year and selling at the close on the last trading day showed no significant effect. Second, buying on the second last trading day and selling after a certain number of trading days, particularly four trading days, revealed a positive return during the first trading days of the new year.

What is the historical performance of stocks on the last trading day of the year?

Buying S&P 500 at the close on the second last trading day of the year and selling at the close on the last trading day did not show a significant New Year’s Eve effect. The average return was zero, and it tended to be negative over the last decades.

What are the implications for investors based on the analysis?

Investors should note that there is no distinct New Year’s Eve effect, but the positive returns in the first few trading days suggest that optimism influences market performance at the beginning of the year. There are many free seasonal trading strategies that investors can explore. These strategies may provide insights into historical patterns and trends in the stock market.

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