Pre- and Post-July 4th Market Performance Analysis

Includes: SPY
by: Moby Waller
Last week's strong rally heading into the July 4th holiday weekend was startling in its strong nature. The S&P 500 Index (NYSEARCA:SPY) gained 5.6% in the five trading days leading up to the holiday. Remembering that we had a big move last year during the same time, I went back and analyzed the performance of the market since 2000 leading into the July 4th holiday and in the days and weeks thereafter.
You can see in the table below that on average, the market hasn't made much of a significant move during the fivce trading days before the summer holiday (net average is only -0.43%). However, over the past six years (since 2006), this has been a volatile time period. The average move in the five days before July 4th since 2006, if you disregard direction, has been up or down 3.21% — over 3x as volatile on a net change basis as it was during the years 2000-05.

That is the first significant thing I see in this data. There is a logical basis behind the market being volatile ahead of a major holiday: Many traders are on vacation and volume will assumed to be lower, so the market can be pushed in one direction or another easier than it normally would.

So how has the market performed since 2000 following the Independence Day holiday? In the five, 10 and 20 trading days after (corresponding to one calendar week, two weeks and one month), the average SPX performance is fairly flat at -0.30%, 0.02%, and 0.52%, respectively. But note the big moves in the past two years -- almost identical rallies in the 10- and 20-day time frames in both 2010 and 2009. The market gained nearly 5% in the two weeks and over 10% in the month after the holiday in the past two years, a high level of outperformance. However, in both of those years we were significantly lower in the week leading up to the holiday (down 5% and 2%), as opposed to this year where we were up over 5%.

[Click all to enlarge]

2000 to 2011 Performance Analysis

Let's examine the past two years on the longer-term weekly chart to get a visual picture of the recent July 4th patterns. You can see below that we had multiple month strong market rallies in both 2009 and 2010 following the summer break. In addition, there was a similar setup of several weeks of weakness that preceded the big rally.

As we mentioned above, the difference with 2011 is that we did actually rally in the week leading up to July 4th versus selling off in the two past years. This may have been due to traders "jumping the gun" in anticipation of this calendar seasonality trend continuing for a third straight year. But also note that we did have a simliar-looking multi-week selloff leading into this time period yet again.

SPX Weekly Chart

Although the overall data doesn't have strong trends, the analysis of previous pre- and post-July 4th market performance indicates a trend of growing volatility leading into the holiday. Additionally, we saw striking rallies in the two weeks to one month (and beyond) time period after July 4th both in 2009 and 2010. It remains to be seen whether this seasonality trend will continue in 2011, but we did have a similar setup pattern of some multiple week selling leading into the holiday — but in the actual five trading days leading into it, the SPX circa 2011 was an opposite performer compared to the past two years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.