Photo credit: Olve Utne, Wikipedia Creative Commons
By Jason Zweig and Tom McGinty
2:13 pm ET Sept. 4, 2013
The Jewish High Holy Days are upon us, with the festive New Year celebration of Rosh Hashana beginning at sundown today and the solemn day of repentance, Yom Kippur, beginning Friday, Sept. 13. So it’s worth looking at a popular old market belief: “Sell Rosh Hashana, Buy Yom Kippur,” often abbreviated in traders’ lingo to “Sell Rosh, Buy Yom.”
Naturally, other traders believe you should buy Rosh Hashana and sell Yom Kippur.
Why would religious holidays affect the secular markets?
Yakov Amihud, a finance professor at New York University’s Stern School of Business, says, “When market liquidity is expected to be lower than normal, expected return should be higher than normal. This may apply for Rosh Hashana.”
In the introduction to his 2012 book Calendar Anomalies and Arbitrage, retired finance professor William T. Ziemba, now an independent trader, wrote that “there seems to be a belief [among] Jewish investors that they should liquidate their portfolios during the holiday so that their attentions could be fully focused on their worship; or more likely in today’s world, not trade.”
There’s also evidence that the stock market does better right before holidays in general, perhaps because anticipating a day off makes some traders feel better and more willing to pay up.
What do the numbers say? Research by finance professors Laura Frieder and Avanidhar Subrahmanyam, published in the Financial Analysts Journal in 2004, found that trading volume on the New York Stock Exchange drops sharply during the Jewish holidays, with a median decline of 18.8% on Rosh Hashana and 23.7% on Yom Kippur. Their research covered 1946 through 2000.
Frieder and Subrahmanyam (let’s call them F&S from now on) found that the festive occasion of Rosh Hashana seems to put investors in a positive mood, with the S&P 500 gaining a mean of 0.23% and a median of 0.25% that day, versus a mean of 0.03% and a median of 0.04% on all trading days.
F&S also found the market performing significantly better on the two days before and the two days after the Jewish New Year. On average, it looks as if you could beat the market by an average of roughly 0.25% on the holiday, the two days before it and the two days after it.
Yom Kippur has been a different story, according to F&S. The mean return that day was -0.18%, and the aftermath was nearly as bad, with an average loss of 0.18% the day after the holiday and another 0.1% on the second day after the holiday. Median returns, while not quite as negative, were still poor.
The data, wrote the researchers, suggested that “traders reentering the market after Rosh Hashana are in an upbeat frame of mind whereas the behavior of those reentering after Yom Kippur appears to reflect the solemn nature of that occasion.”
Or maybe some people look forward to eating a pile of honey cake on Rosh Hashana, while stuffing themselves with cholent before Yom Kippur puts them in a foul mood.
This week, we updated the F&S analysis to include the years 2001 through 2012.
Rosh Hashana and Yom Kippur fell on trading days in eight of those 12 years, so the new data add only marginally to the earlier findings.
But our results seem to show that the trend, if ever there was one, has reversed. On Rosh Hashana since 2001, the S&P 500 has gained an average return of 0.74% (and a median of 0.38%) – considerably stronger than F&S’s results. But stocks have stunk on the surrounding days, losing an average of 1.95% the day before and another 0.65% and 1.28% on the next two days. (Median returns are negative for those days as well.)
Meanwhile, the two days leading up to Yom Kippur and the Day of Atonement itself have been negative, with stocks losing an average of 2% over the three-day stretch (the median for the three days is also negative). Then, on the two days after the holiday, mean and median returns flip back to positive.
So this turns out to be like many “market anomalies.” It isn’t very predictable or reliable, and if you tried to trade on it you’d have no profits left after paying transaction costs and short-term capital-gains taxes.
In short, you don’t stand a prayer of making any money off it.
Source: WSJ.com, Total Return blog