Indicator of the Week: Will Stocks Heat Up After Memorial Day?

The S&P 500 Index (SPX) historically underperforms in the three-month period between June and August

Senior Quantitative Analyst
May 25, 2016 at 7:05 AM
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The unofficial start to summer is next week, with markets closed on Monday for Memorial Day. Other than a long weekend and a four-day trading week, what has this historically meant for stocks? 

The table below summarizes the weekly returns of the S&P 500 Index (SPX) since 1971 (the year Memorial Day officially became the last Monday in May), and also since 2010, which has been a pretty good time for stocks, since the aftermath of the financial crisis. Over the longer term, Memorial Day week has outperformed the typical week for stocks. The SPX has averaged a 0.54% gain during the holiday week, compared to a gain of just 0.16% during any week. The more recent years, however, have been an entirely different story. The SPX declined an average of 1.40% during Memorial Day weeks in the last six years, and was positive just one time. The typical week averaged a 0.20% gain, with 58.3% of them positive.  

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Daily Returns: There are some interesting observations to be made when you break down the holiday week by the day. The first table below looks at Memorial Day weekly returns by day, beginning with the Friday before the long weekend. The second table shows all days since 1971 for comparison. (Monday in that table is understated, since there's no data for comparison in the first table.) 

The first day of the holiday week is Tuesday, and it's pretty bullish when you look at the average return of 0.23%. However, it has been positive less than half the time, so we can conclude there has been significant upside volatility at the beginning of the week. The standard deviation of returns is 1.22%, which is quite high compared to other Tuesdays, but very similar to Monday -- which I would say is a better comparison, being the first day back after a weekend. (There's more volatility after weekends, since news over the off days must get priced into the markets the first day back.) I'm not sure if there's a reason we've seen more upside volatility on the first day of the week, or if it's simply randomness.  

Looking at the other days of the week, it's notable that Wednesday through Friday have all been positive more often than typical days. Each of those days during Memorial Day weeks has been positive at least 60% of the time, while they're typically positive in the low- to mid-50% range. Historically, Memorial Day week has been bullish, due to a tendency toward upside volatility on Tuesday and more positive returns the rest of the week.  

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I mentioned earlier that the more recent returns have been pretty poor. The table below shows the individual weekly returns during the holiday weeks since 2010, while the following table summarizes those six years. You can see that over this time frame, 2014 was the lone positive year, gaining 1.21% for the week. It's interesting that in each of these years, Wednesday has moved in the opposite direction as Tuesday. Each year the week began with a gain, Wednesday gave back at least some of those gains. If the week started lower on Tuesday, then Wednesday moved higher. Also notable is how dismal Friday has been during these recent holiday weeks, averaging a loss of 1.46% and ending positive in just one of the six years.  

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Summer Doldrums: Finally, the good news is that Memorial Day marks the beginning of summer -- if you like summertime, that is. The bad news is that over the past twenty years, the three months from June through August have made up the worst three-month period of the year for stocks. The SPX averaged a loss of 1.25%, and was positive just half the time, from the end of May until the end of August. (By the way, the June-through-August and July-through-September returns both round to negative 1.25%, but the June-through-August returns are slightly worse when going out another decimal point.) It would be great to buck this trend -- and get sunny weather AND higher stock prices in 2016. 

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