The Martin Luther King Jr. Day Holiday Effect In Trading (Backtest And Strategy)

Last Updated on September 19, 2022

Martin Luther King Jr. Day is one of the federal holidays observed in the US. How does it affect trading on the US stock markets?

The US financial markets do not open on Martin Luther King Jr. Day, which is the third Monday in January. No trading takes place on any of the U.S. stock exchanges. Our backtests indicate this is a day with pretty random stock movements without any significant trading patterns.

What is the Martin Luther King Jr. Day holiday?

Martin Luther King, Jr., Day is a federal holiday in the United States to honor the achievements of Martin Luther King, Jr. — a Baptist minister who advocated the use of nonviolent means to end racial segregation. The holiday is observed on the third Monday in January.

The day is typically celebrated with marches and parades and with speeches by civil rights and political leaders.

Why do we celebrate it?

The day commemorates the life and work of Dr. King, who was a Baptist minister and prominent leader in the American civil rights movement and was assassinated in 1968. The entire nation remembers the civil rights hero who was instrumental in the passage of the Civil Rights Act of 1964, which outlawed discrimination in public accommodations, facilities, and employment, and the Voting Rights Act of 1965.

We use that day to reflect on the principles of racial equality and nonviolent social change espoused by Dr. King.

When did we start celebrating it?

The call to have a national holiday in honor of Dr. King began almost immediately after his death. By 1970, a number of states and cities made his birthday, January 15, a holiday. However, it took a long fight to get the 1983 legislation that made the third Monday in January a federal holiday in his honor. The first nationwide observance of the holiday came in 1986.

Is it a nontrading day?

Yes, it is a nontrading day in the US, as all U.S. financial markets close for the holiday. No trading takes place on the New York Stock Exchange or Nasdaq on Martin Luther King Jr. Day.

The Martin Luther King Jr. Day holiday effect – backtest

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:

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

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%.

Thus, the Martin Luther King holiday is not a good seasonality pattern.

Holiday effects in the stock market

We have covered all the US stock market holiday effects in trading. To sum up, we have the following other holiday effects in the US markets:

• George Washington Day/President’s Day holiday effect in trading (Backtest and strategy)
• The Easter Holiday effect in trading (Holy Thursday – best day of the year for stocks? Backtests and strategies)
• The Memorial Day Holiday Effect In Trading (Backtest And Strategy)
• The 4th of July Holiday Effect In Trading (Independence Day Effect – Backtest and strategy)
• The Labor Day Holiday Effect In Trading (Backtest And Strategy)
• The Thanksgiving and Black Friday effect in the stock market (Backtests and strategies)
• The End Of The Year Rally In Stocks (Santa Claus Rally/Effect Strategy backtests and strategies)