Pre-Holiday Stock Effect

Studies show spending can drive economic activities and influence financial markets. Markets are favorable before a holiday or a long weekend, commonly referred to as Pre-Holiday or long weekend effect.

The Pre-Holiday Effect is the tendency for the stock market to gain on the final trading days before a holiday. Research studies suggest stock market returns during pre-holidays and long weekends are more than regular trading days.

One reason could be the natural tendency of investors to be optimistic before the holidays. Another reason for the bullish market bias is the lower liquidity in the marketplace as participants go away for the holidays. Also, short-sellers tend to close their hedges before the holidays and long weekends. Yet another reason to explain this bullish trading phenomenon is the lack of macro news results in stocks trading higher.

Short-term trading using the Pre-Holiday effect strategy can be profitable for traders. Historical studies suggest that buying the S&P 500 Index one day before Christmas and selling it at year-end have rewarded traders with gains of over 15% in the last 50 years. The Pre-Holiday phenomenon also rewards longer-term investors by enabling them to average in on their long-term investments.

With the above thoughts in mind, let us turn to the short-term daily charts to determine if this will be another profitable Pre-Holiday Effect. An overbought condition accompanied by a bearish negative outside day yesterday (12/20/23) warns of a near-term pullback.

However, an inside day has developed today (12/21/23). An inside day occurs when today’s trading range trades within the intraday high (4,778.01) and low (4,697.82) of the previous day. Historically, this implies a neutral condition where the bulls and bears are dead-locked.

The next few days will help to determine whether the bulls can re-exert their influence in the marketplace. A move above the 12/20/23 intraday high (4,778.01) helps to negate the negative outside day, igniting the next bull rally toward a retest of Jan 2023 high (4,818.64) as early as year-end to early 2024. Setting new record highs also suggests a 2024 projection of 5,110.36 based on the recent 12/11/23 breakout above 4,607.07 or 503.29 points.

The last time a bearish negative outside day and an inside day was on 7/27/23 and 7/28/23. The 8/2/23 gap-down breakdown below 4,528.56 triggered a pullback toward 4,335.31 (8/18/23), as SPX fell 271.76 points or 5.90% from its 7/27/23.

A decline below the 12/20/23 intraday low (4,697.82) confirms the start of consolidation toward initial support at 4,607-4,637 (Mar/Jul 2023 highs and 12/11/23 breakout) and below 4,512-4,547 (Nov 2023 breakout, Dec 2023 lows, and the 38.2% retracement from 10/27-12/20/23 rally) and below 4,422-4,460 (11/14/23 gap-up, 50% retracement, and the 50-day ma), and 4,319-4,361 (Jun 2023 breakout, 11/3/23 gap-up, 200-day ma, and 61.8% retracement).

Happy Holidays!

Source: Chart courtesy of StockCharts.com