Why Next Friday Could Be a Brutal Day for Stocks

When the S&P 500 is higher year-to-date heading into Memorial Day, it bodes well for the rest of the year

Senior Quantitative Analyst
May 24, 2017 at 6:30 AM
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Next Monday is Memorial Day, a time to remember those who have given their lives while serving in the armed forces. For many, it means parades, cookouts over the weekend, and the unofficial start of summer. For the stock market, it means a shortened four-day trading week. Below, we will discuss some stock market data based on the holiday week.

SPX Returns During Memorial Day Week

Memorial Day officially became the last Monday in May starting in 1971. Since then, as the table below indicates, the week of Memorial Day has been a pretty good one for the S&P 500 Index (SPX). The average return of 0.53% beats the typical weekly return of 0.16%, with a higher percentage of positive returns, as well -- about 61% vs. 56%.

However, looking at more recent data since 2010, the holiday week has been quite bad for stocks. Over the past seven years, the S&P 500 has averaged a loss of over 1% during Memorial Day week, with only two of those returns positive.

           IOTW Chart 1

Breaking Down SPX Returns by Days of the Week

Below is a breakdown of Memorial Day week by each day, starting with the Friday before the long weekend. The Friday before the holiday, the SPX has performed only slightly better than average. The main reason for any outperformance during the holiday week has been due to the big gains that occur toward the beginning of the week.

Tuesday has been positive less than half the time -- but when it has, it's typically a pretty big gain. Therefore, despite the low percentage of positive returns, the average return for the first day of Memorial Day week is 0.23%, which is far and away better than the typical Tuesday.

Wednesday through Friday are all positive roughly 60% of the time, which is better than the typical returns. Thursday stands out, however, as very bullish, with an average return of 0.20%.                         

IOTW Chart 2

Below is the daily breakdown since 2010, when the holiday week returns have been generally bearish -- and it's all gone wrong for the SPX at the end of the week. The Friday of Memorial Day week has been positive just once in the last seven years, averaging a loss of 1.29%.                            

IOTW Chart 3

Why the SPX's Year-to-Date Performance Bodes Well for Stocks

The table below could be good news for the rest of the year. This study looks at SPX returns for the rest of the year after Memorial Day week, depending on whether the market was positive or negative year-to-date before then.

If the index was higher year-to-date, then the rest of the year was positive roughly 73% of the time, averaging a return of 5.75%. If stocks were down on the year, then the index averaged a measly 2.75% loss, with just 38.5% of the returns positive.

The SPX is currently up nearly 7% year-to-date, so hopefully this pattern holds true for 2017.                                  

spx after memorial day

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