Independence Day Look-see
Holiday trading strategies are always a source of interest for traders, as it provides one of the more consistent edges available. With July 4th approaching quickly, it's time to look at the biases around this particular day.
The chart below shows how the S&P 500 has performed from 1950 - 2002 during the four days surrounding Independence Day. We can quickly see that the two days immediately prior to the holiday (-2 and -1 on the chart) tend to give an average return greater than the two trading days after the holiday. The market also closes positively more consistently before the holiday than after.
The most consistent pattern around July 4th is that the market is the most positive the day immediately prior to the holiday (Thursday this year), and the most negative two days after everyone gets back (Tuesday this year). This is determined not only by the average return on those days and the percentage of time they are positive, but also by how often and by how much prior days' highs and lows are exceeded.
Some holidays have very distinct edges, and it pays for short-term traders to be aware of them. July 4th is one of the weaker ones, but it still exhibits the classic holiday trading pattern - strength immediately before the holiday and weakness after. In my opinion, there is NOT enough evidence here to support a trade in and of itself, but I think it's still beneficial to keep these biases in mind when approaching the days.
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