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The Stock Market Holiday Effect

The holiday effect shows that stocks tend to rise on the day after market holidays.

One explanation of the holiday effect is that the market rises by an adequate amount in order to make up for the lost trading day. However this theory runs contrary to what happens when markets reopen after the weekend, known as the Monday effect.

An alternate explanation for the anomaly is that investors come back to their desks in a more optimistic mood and are therefore more likely to buy equities.

Another idea is that while US markets are closed for the holiday, foreign markets are direction-less and less liquid. They tend to drift higher resulting in a higher open for the US market on the day after the holiday.

Of course, as with all the market anomalies we are discussing, there is also the possibility of data mining or natural variance. Just because a market anomaly worked in the past doesn’t mean it will continue in the future.

The following chart from Stern NYU shows how average returns for the first trading day after a holiday have been net positive for all holidays except the Fourth of July. The day after Labor Day is best with an average return of almost 0.40%:

stock market anomalies holiday effect

Strategy:

You can buy stock index futures or baskets of stocks on the close of trading before a market holiday. You can then exit at close on the next full day of trading to lock in gains from the holiday effect.

I hope this little secret will pay for your entire holiday season!

Happy Thanksgiving

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