Market Direction and Stock Trends

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The short holiday week tends to be a sluggish one for the S&P 500
By: Schaeffer's Investment Research | January 17, 2019

This year marks the 21st that the U.S. stock market will be closed in observance of Martin Luther King Jr. Day, which means we now have a round 20 years' worth of historical data to draw from in analyzing the impact, if any, this mid-January holiday has on investors. We've already shared what have historically been the best and worst stocks during the short holiday week -- along with a crucial note on the significance of correlation vs. causation as it relates to this data -- so in this analysis, we'll take a look to see if there are any discernible trends or patterns in the behavior of the broader S&P 500 Index (SPX) relating to MLK Day.

MLK WEEK RETURNS TEND TO LAG

Since investors began officially observing MLK Day in 1998, the short week has been a lackluster one for the SPX, according to data compiled by Schaeffer's Senior Quantitative Analyst Rocky White. The average return during MLK week is a loss of 0.53%, per the table below, compared to an average return of 0.12% during other weeks. Similarly, the median return is negative during MLK week, at a loss of 0.15%, compared to a positive median return of 0.23% in other weeks.

More broadly, less than half of these holiday weeks -- 42.9% -- have been positive over the past two decades, compared to 56.2% of other weeks. What's more, the average positive return during MLK week is smaller, arriving at just 1.11% compared to 1.66%. That said, the average negative return is also milder, arriving at a drop of 1.75% during MLK week vs. 1.85% during other weeks. That's because volatility tends to be more muted during the post-holiday trading period, with the standard deviation of returns checking in at 1.83%, vs. the "anytime" 2.43%.



Narrowing our view to the period since 2009, which limits our analysis primarily to those returns generated during the bull market, post-MLK returns don't lag other weeks quite so significantly. The average MLK week return is still negative, but is cut in half to a loss of just 0.25% -- and the median return is actually positive, at 0.36%.

Meanwhile, the percentage of positive returns jumps to 50%, and the average positive return rises to 1.41%. That said, the short holiday week still underperforms comparable SPX returns during other weeks of the year on nearly every measure.



BREAKING DOWN MLK WEEK BY THE DAY

The first table below shows the stats breakdown by day of the week -- first for MLK week since 1998, then the anytime returns since 1998. As you can see, three out of the four trading sessions in the post-holiday week -- Tuesday, Thursday, and Friday -- yield a negative average return for the SPX. Plus, Thursday and Friday have negative median returns during MLK week, and just 42.9% positive returns. By contrast, all four of those weekdays have positive average and median returns on an "anytime" basis over the past 20 years, and more than 50% positive returns.

If there's one day with the potential to be a bullish standout next week, the odds favor Wednesday. The average MLK week return for Wednesday is 0.25%, with 61.9% positive returns. That compares favorably with an average anytime return of 0.04% and 54.4% positive.



HOW THE POST-MLK YEAR PLAYS OUT

Finally, switching gears to look at the SPX-tracking SPDR S&P 500 ETF Trust (SPY), White crunched the numbers to see how the rest of the year tends to unfold for stocks depending on how SPY has performed up to the long MLK weekend. When the broad-market benchmark is modestly higher -- by less than 2% -- it tends to lead to modest gains through year-end, with the average rest-of-year return arriving at 4.04%, and 66.7% of the returns positive.

When SPY is negative heading into the MLK weekend, it actually results in the highest percentage of positive rest-of-year returns, at 75%. What's more, the average rest-of-year return is 5.34%, edging out the 4.04% gain collected when stocks are slightly higher heading into the holiday.

Finally -- with SPY sitting on a gain of 4.4% year-to-date as of this writing -- note that when the exchange-traded fund (ETF) is up more than 2% going into MLK week, it averages a rest-of-year return of 8.66%, with 71.4% of the returns positive. If this trend of bullish momentum begetting more bullish momentum repeats in 2019, it could be a rewarding year for investors.



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