Why Presidents Day Could Spell Trouble for Stocks

Traders should be ready for additional S&P 500 Index (SPX) volatility next Tuesday

Senior Quantitative Analyst
Feb 11, 2015 at 7:53 AM
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It's Presidents Day next Monday, which means a four-day week for stock trading. This week, we'll look back over the past 20 years to see how the market has fared during this particular holiday week -- and then we'll look more generally at short trading weeks. Additionally, we'll examine whether long weekends lead to more volatile trading.

Presidents Day Week: The table below summarizes how the S&P 500 Index (SPX) has performed during the week of Presidents Day and compares it to other weeks. You can see it has been an underperforming week over the last 20 years. The holiday week averages a loss of 0.27%, and has been positive just half of the time. Furthermore, the index has lost value in three of the last four Presidents Day weeks. As you can see, during a typical week, the SPX averages a 0.18% gain, and is positive 56% of the time.

SPX Weekly Returns Since 1995

Here's a table breaking down Presidents Day week by trading day. I also included a table for other weeks for comparison. Tuesday through Thursday all average a loss, and then Friday has tended to be modestly positive during the holiday week.

I found Tuesday, the day after Presidents Day, to be especially interesting. It has averaged a loss of 0.23%, despite being positive 60% of the time over the past 20 years. The standard deviation shows that day has had higher-than-normal volatility. It's the first day back from a long weekend -- so you might expect a little more volatility, since there's an extra day of news to get priced into the market once stocks begin trading again.

SPX Presidents Day Week

Short Trading Weeks: Let's look more generally at short weeks and see if it's common for long weekends to lead to more volatile trading days. The table below shows that short trading weeks have outperformed regular 5-day trading weeks. However, when you break down the shortened weeks by whether the holiday falls on a Monday, a Friday, or another day, it makes quite a difference. When Monday is the day off (like next week), stocks have underperformed, averaging a return barely above breakeven at 0.04%. When Friday is the holiday, the SPX averages a gain of 1.08% for the week, with 71% positive returns.

SPX Weekly Returns Since 1995

Daily Volatility: We saw above the heightened volatility after the long weekend due to Presidents Day, raising the question as to whether the number of non-trading days between trading days led to more volatile sessions. Again, the theory is that when the market is open, it needs to price in the news that occurred since the last trading day. With long weekends, there's an extra day of news the market needs to absorb, which is also an extra day that a possible market-moving event might occur. Below is a table that tries to quantify this effect.

I'm focusing on the standard deviation, as that's what I'm using to measure the volatility of the trading days. This table summarizes daily SPX returns, depending on the number of days between trading days. The "0" column shows the daily results when the market was open the day before. As you can see, the standard deviation of those returns is 1.18%. When you have a non-trading day between two trading days (as is the case whern a holiday occurs in the middle of a trading week), then the standard deviation moves up ever so slightly, by 0.007 percentage point. A typical weekend has two days between trading days (Saturday and Sunday). In that case, the standard deviation moves up to 1.338%. Finally, after a long three-day weekend, the standard deviation is only a bit higher than that, at 1.342%. So it does seem to be the case that longer weekends lead to more volatility once trading resumes, but not by too much.

SPX Standard Deviations Since 1995

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