Monday, October 27, 2008

The Holiday Effect - Stock Markets

Over the past century, there have been nine holidays during which the Exchanges have traditionally been closed. Historical research shows that stock prices often behave in a specific manner in each of the two trading days preceding these holidays. By becoming aware of this behavior, both short-term traders and longer-term investors can benefit.

The general strategy is to purchase equities one or two days prior to a holiday. Short-term traders would look to sell just after the holiday while longer-term investors would wait until year end. Both strategies have proven to be profitable plays. The theory behind this effect is that traders are lightening up their holdings (selling) prior to the three day holiday in order to avoid any unexpected bad news. The selling pressure drives stock prices down, making those days a good opportunity for buying lower in the range.
Here is the average pre-holiday results for the last 50 years, based on the S&P 500 Index:

Holiday / Buy 2 days before, Buy 1 day before and sell at year end

Independence Day / 13.3% / 37.3%
Labor Day / 16.8% / 33.7%
Election Day / 17.9% / 4.6%
Thanksgiving / 4.3% / 1.1%
Christmas / -7.1% / 15.2%
New Year's / 31.1% / 19.6%

My source for this is Stockcharts - Chart School. Do your own research. For specific stock picks/ideas feel free to contact me at Good luck and Happy Trading

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