Most investors and traders are familiar with seasonal effects on the stock markets, like the Christmas rally and "Sell in May, and go away." Yet few know that Valentine’s Day also influences stock indices. So, as you gear up for a romantic time with your loved one, you now have an excuse to take another peak at your mobile and ThinkMarkets trading account.
What is the Valentine's Day effect?
According to academic research, there is no rational explanation for the gain we see in stocks during this period, and it cannot be attributed to strategies like tax-loss selling and inventory adjustments hypotheses.
The former involves investors offloading assets at a loss towards the year's end to minimise taxes, leading to temporary price dips in affected stocks. Meanwhile, the inventory adjustment hypothesis suggests that investors take note of a company's changes in inventory levels as a clue as to whether to buy or sell the stock.
Instead, academic papers suggest it is all about our mood. Valentine's Day makes investors happy, and they buy stocks more than they would on any other random day.
The more a country celebrates Valentine's Day, the stronger the effect on the stock index. According to a paper published by the Chinese University of Hong Kong: Will Stock Rise on Valentine's Day?, outside of the USA, China exhibits the most profound effect, followed by France and the United Kingdom.
What can you expect?
Unlike other holidays, Valentine's Day is not a public holiday in any country; therefore, the markets are open, and you can trade this day. Stock indices like the Dow Jones (US30) and the S&P 500 (SPX500) tend to gain in the three days heading into Valentine's Day and the day itself. According to the research cited above, if we take the return for any random day, the relative gain will be almost 20% higher on the days heading into Valentine's.
In a separate report by Quantifiedstrategies.com, the S&P 500 will gain two times the return gained from any random trading day, and produce return of 21.8% by just trading 2.8 days per year between 1960 and 2023.
Here is the strategy they tested
Buy Date: Purchase on February 10, or the next trading day if February 10 falls on a weekend.
Sell Date: Sell at the end of trading on February 14, or the next trading day if the market was closed on the 14th.
Data Period: Analysis is based on data from 1960 to 2023.
Expected Return: Suggests a return of 21.8% following this strategy.
Duration: Positions are held for an average of 2.8 days.
Average Return: The average return per trade was 0.32%.
Win Rate: The strategy had a win rate of 62%.
As Valentine's Day approaches, here's a romantic tip: share this report with your significant other, especially if they've caught you gazing at your trading account more often than into their eyes.
Remember, though, that the course of true love never ran smoothly, and neither did historical market patterns. Incorporating the Valentine's seasonal effect into a broader trading strategy might be the secret ingredient to your trading account health, rather than relying on Cupid's arrow alone to hit the bullseye.
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