The Pre-Holiday Effect

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 two days before, sell at year end Buy one day before, sell at year end
President’s Day* -0.1% 12.2%
Good Friday 7.3% 17.8%
Memorial Day -4.7% 22.8%
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%



*Note: President’s Day data is comprised of the aggregate of both Washington and Lincoln’s Birthday prior to 1998.
The original research was based on the behavior of the S&P 500 Index around the 419 holiday market closings that occurred from 1928 to 1975.
To put those returns in perspective, if you had invested $10,000 in the S&P 500 Index in January 1928 and sold it all in December 1975, you would have ended up with $51,441. However, if you had invested one-ninth of your money just before each pre-holiday period (selling everything at the end of the year), you would have finished with $1,440,716. Not bad!