The stock market can be affected by having extra days off for Thanksgiving or Christmas. The markets tend to see increased trading activity and higher returns the day before a holiday or a long weekend, a phenomenon known as the holiday effect or the weekend effect.
Stock prices rise after Christmas
Since the new fiscal year starts in January, the weeks after Christmas is therefore marked with the stock market becoming invigorated by fresh capital, be it from companies looking to expand or investors having more resources at their disposal.
Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a sell-off.
The Dow has averaged a gain of 1.93 percent in that time period since 1990, while the S&P 500 and Nasdaq gain 1.77 and 1.66 percent, respectively.
It's been said that tax planning is a major driver of the January Effect. According to this hypothesis, investors sell off underperforming stocks in December to lock in a capital loss for the year, thereby reducing their tax bill, which causes a temporary dip in prices.
November is tied with April for being the second-best month of the year, with the Standard & Poor's 500 rising 1.5% on average during the month since 1950, says the Stock Trader's Almanac. And that comes ahead of December, which has been the best month, adding 1.7% on average.
The stock market can be affected by having extra days off for Thanksgiving or Christmas. The markets tend to see increased trading activity and higher returns the day before a holiday or a long weekend, a phenomenon known as the holiday effect or the weekend effect.
December is a good month for stocks overall, and these stocks tend to do even better than the market, rising at least 80% of the time and producing as much as 9.5% gains during the month.
Holiday Stock Market Strategy
The reason this works is because some traders will sell their stocks right before Christmas in order to mitigate any risks that may come in the form of post-Christmas company announcements. This bulk selling of stocks drives prices down, making pre-Christmastime a great time to buy.
The stock market is subject to a seasonal effect in that at certain times of the year, month or even week, share prices can rise or fall.
December is also a generally good month for trading, though there's a noticeable decrease in market activity near the end. The main reason for this fluctuation in volatility, is holidays. Any holiday period naturally leads to a decrease in trading volumes.
In short, the 3-day rule dictates that following a substantial drop in a stock's share price — typically high single digits or more in terms of percent change — investors should wait 3 days to buy.
The Santa Claus rally refers to the tendency for the stock market to rally over the last weeks of December into the new year. Theories for its existence include increased holiday shopping, optimism fueled by the holiday spirit, and institutional investors settling their books before going on vacation.
Instinet technical strategist Frank Cappelleri notes that January has been one of the worst-performing months over the past 20 years, with both the Dow and S&P 500 dropping in January in both 2019 and 2020. “The 'average' path has been a bumpy first quarter and a bottom in March,” he says.
Key Takeaways
Since 1950, the Dow Jones Industrial Average (DJIA) has averaged a decline of 0.8%, while the S&P 500 has averaged a 0.5% decline during the month of September. The September Effect is a market anomaly, unrelated to any particular market event or news.
The six trading days after Christmas enjoy stronger seasonal tailwinds than any other six-day period of the calendar. So pay close attention if you're tempted to trade according to seasonal patterns.
The January effect is a hypothesis that there is a seasonal anomaly in the financial market where securities' prices increase in the month of January more than in any other month.
With the course of the week, markets usually tend to take an upward trend that peaks on Fridays. This means that it is a good idea to think about shorting stocks on Friday and covering your positions back on Monday when the market gets to lower levels.
Stock prices fall on Mondays, following a rise on the previous trading day (usually Friday). This timing translates to a recurrent low or negative average return from Friday to Monday in the stock market.
The 'End of Month' effect has been the subject of many scientific studies. Statistics show that stock prices, and in particular US stock prices, tend to go up during the last days and the first days of the month.
The tendency of stocks to perform better in December than in any other month of the year. This may be because of increased sales and earnings due to the Christmas season, or because of expectations for new products at the start of the next year.
The upshot: Like early market trading, the hour before market close from 3 p.m. to 4 p.m. ET is one of the best times to buy and sell stock because of significant price movements, higher trading volume and inexperienced investors placing last-minute trades.
Regular trading begins at 9:30 a.m. EST, so the hour ending at 10:30 a.m. EST is often the best trading time of the day. It offers the biggest moves in the shortest amount of time. Many professional day traders stop trading around 11:30 a.m., because that's when volatility and volume tend to taper off.